As commodity grain prices decline, University of Illinois’ ag economist Gary Schnitkey is advising farmers to reduce their capital expenditures sooner rather than later.
“During recent years, capital purchases on grain farms have more than tripled on a per acre basis,” said Schnitkey of the Dept. of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, in a Dec. 2 Farmdoc Daily report. “Capital purchases will need to decrease given the lower net incomes projected over the next several years. Not reducing capital purchases by enough could result in financial stress in future years.”
Schnitkey has charted data on the average values of capital purchases on a per tillable acre basis of Northern Illinois grain farms enrolled in Illinois Farm Business Farm Management. He includes machinery, buildings and other items that generally have a life of one year or more as capital expenditures.
According to the report, annual capital purchases by these farms averaged $43 per tillable acre between 2000 and 2006. During this period, average expenditures ranged from a $34 low to a high of $51 per tillable acre. During the next 8 years, capital spending per acre skyrocketed: $116 per tillable acre in 2011, $145 in 2012, $154 in 2013.
Schnitkey attributes the rise in capital purchases to the sharp increase in farm net income in recent years, which led to higher disposable income. Coupled with generous depreciation schedules, farmers were able to write off the capital purchases against the higher income, which allowed them to defer their tax payments.
Forecasts of lower net incomes for 2015 and possibly beyond, Schnitkey says, “Capital purchases will need to decrease.” His concern centers on the lag between the time when net incomes decline and farmers wind down their capital purchases.
Schnitkey points out that 2013 net income was down from 2012, but capital spending continued to increase in 2013. “Incomes in 2014 could be near levels in 2000 through 2005, suggesting that capital purchases should also decrease to 2000-2005 levels,” he said. “A decrease of this magnitude would mean that capital purchases decrease from the mid-$100 levels seen in 2010 through 2013 back to around $40-$50 per tillable acre.”
The University of Illinois ag economist added, “When incomes fell in the 1980s, there was a lag before capital purchases decreased.
“This lag contributed to financial stress during the 1980s. Lowering capital purchases now could lessen the potential for financial stress in the next several years.”