• TABLE OF CONTENTS
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 Front Cover
 Foreword
 Abstract
 Introduction
 Farm financial simulation...
 Results and discussion
 Conclusion
 Reference
 Detailed financial summaries of...














Group Title: Economics report - University of Florida Agricultural Experiment Station ; 112
Title: Financial stress in agriculture
CITATION THUMBNAILS PAGE IMAGE ZOOMABLE
Full Citation
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Permanent Link: http://ufdc.ufl.edu/UF00027546/00001
 Material Information
Title: Financial stress in agriculture policy options and financial consequences for farmers in North Florida
Series Title: Economics report
Physical Description: ii, 39 p. : ill. ; 28 cm.
Language: English
Creator: Boggess, William G
Alderman, Rom
University of Florida -- Food and Resource Economics Dept
Publisher: Food and Resource Economics Dept., Agricultural Experiment Stations, Institute of Food and Agricultural Sciences, University of Florida
Place of Publication: Gainesville
Publication Date: 1986
 Subjects
Subject: Farm income -- Mathematical models -- Florida   ( lcsh )
Farm management -- Mathematical models -- Florida   ( lcsh )
Farmers -- Economic conditions -- Florida   ( lcsh )
Genre: government publication (state, provincial, terriorial, dependent)   ( marcgt )
bibliography   ( marcgt )
non-fiction   ( marcgt )
 Notes
Bibliography: Includes bibliographical references (p. 22).
Statement of Responsibility: William G. Boggess, Rom Alderman.
General Note: "December 1986."
General Note: Cover title.
 Record Information
Bibliographic ID: UF00027546
Volume ID: VID00001
Source Institution: University of Florida
Rights Management: All rights reserved by the source institution and holding location.
Resource Identifier: aleph - 001612798
oclc - 23684247
notis - AHN7186

Table of Contents
    Front Cover
        Front Cover
    Foreword
        Page i
    Abstract
        Page ii
    Introduction
        Page 1
        Page 2
    Farm financial simulation procedures
        Page 3
        Page 4
        Page 5
        Page 6
        Page 7
        Page 8
        Page 9
    Results and discussion
        Page 10
        Page 11
        Page 12
        Page 13
        Page 14
        Page 15
        Page 16
        Page 17
        Page 18
        Page 19
        Page 20
    Conclusion
        Page 21
    Reference
        Page 22
    Detailed financial summaries of the various scenarios
        Page 23
        Page 24
        Page 25
        Page 26
        Page 27
        Page 28
        Page 29
        Page 30
        Page 31
        Page 32
        Page 33
        Page 34
        Page 35
        Page 36
        Page 37
        Page 38
        Page 39
Full Text







FORWARD


This research reflects the Florida contribution to the S-180 regional project entitled,

"Financial Stress in Agriculture: Policy Options and Financial Consequences for Farmers."

The authors would like to thank Tim Hewitt and John Holt for their assistance in specifying

the base farm data.








ABSTRACT


A farm financial simulation model is used to analyze the financial consequences of

various policy options and strategies that North Florida farmers might follow in responding to

the financial stresses of the mid-1980s. A variety of combinations of economic forecasts,

beginning leverage positions, and financial stress-relief policies are analyzed for a repre-

sentative farm. The results of the analysis are intended to provide an information base for

understanding the dimensions of financial stress problems in North Florida agriculture, the

effectiveness of alternative strategies for responding to stress, and the longer term

performance prospects in the area.



Keywords: financial stress, leverage, farm financial simulation









FINANCIAL STRESS IN AGRICULTURE: POLICY OPTIONS AND
FINANCIAL CONSEQUENCES FOR FARMERS IN NORTH FLORIDA.


INTRODUCTION


During the 1980s the U.S. farm sector has experienced one of the deepest and most

widespread recessions since the 1930s. Farm income has been low in both nominal and real

terms, interest rates have been high, and land values have declined. Consequently, financial

average has continued to increase. While the effects of these conditions vary considerably

among farmers, the incidences of credit problems, loan delinquencies, foreclosures, and

bankruptcies in agriculture have reached significant levels. Moreover, a rippling effect has

occurred to adversely affect the well-being of many farm lenders, agri-businesses, and rural

communities whose financial performance is strongly influenced by economic conditions in

agriculture. Due to these financial stress problems, by farmers, farm groups, lenders and

others to have brought increasing pressure for a public assistance at a time when the high

cost of public programs of the past has had dissatisfaction and close scrutiny from nonfarm

groups. Moreover, farmers and their lenders are placing heavy emphasis on managing liquidity

and restructuring financial situations to improve their prospects for farm survival and

economic viability in the future.

The number of farmers experiencing different degrees of financial stress is difficult to

estimate. Comprehensive data are not available about all of the key financial indicators, nor

is it easy to associate stress conditions with the various structural characteristics of farms:

size of farm, tenure position, farm type, level of leverage, age of operator, and so on. Most

of the assessments have been based on debt-asset ratios of different size classes of farms, as

well as on estimates of cash flow available to service debt. The U.S. Department of

Agriculture, for example, estimated at current interest rates and levels of net returns in

farming, that farms with debt-asset ratios of over 40 percent are likely experiencing cash

shortfalls, and thus are having serious financial problems (ERS). Farmers with debt-asset









ratios above 70 percent are almost certain to have serious cash shortfalls, and are under

extreme financial difficulty.

Based on survey data and an analysis of the financial characteristics of U.S. farms on

January 1, 1986, an estimated 4 percent of all farms were technically insolvent; that is, they

had debt-asset ratios over 100 percent (ERS). An additional 5 percent had debt-asset ratios

between 70 percent and 100 percent, and faced dim prospects for surviving two more years

like the recent past. A further 13 percent had debt-asset ratios between 40 percent and 70

percent. These farms were believed to have serious cash flow shortfalls but likely could

survive perhaps another four years under conditions similar to the recent past without

becoming technically insolvent. Similar comprehensive survey data is not available for the

North Florida region. However, a limited study of Jackson County in 1984 indicated that over

25 percent of the farms had leverage ratios in excess of 40 percent (Anaman).

The breadth and depth of the current financial problems in agriculture have created a

significant dilemma for farmers, lenders, policy makers, and others in how to respond. Many

of the risk management practices available to farmers are not very effective in resolving

serious and almost chronic cash flow problems. Many protective responses in production and

marketing, for example, are short term options designed to maintain or stabilize production

levels or prices within the production year. They are important for these purposes, but may

not help much in dealing with financial crisis situations.

The purpose of this study is to evaluate the financial consequences of various policy

options and strategies that farmers might follow in responding to the financial stresses of the

mid-1980s. The analysis is a longer term one, focusing on, a three to five year horizon that

likely is needed for a reasonable transition from the current adversities toward improved

economic conditions in the future. The major evaluative criteria include the impacts of

alternative policy response mechanisms on the profitability, liquidity, solvency, and risk

positions of these farm businesses. The results of the analysis are intended to provide an








information base for understanding the dimensions of financial stress problems in North

Florida agriculture, the effectiveness of alternative strategies for responding to stress, and the

longer term performance prospects for farms in the area. In turn, this information base should

prove useful in analyzing the effects of alternative farm policies and credit programs.


FARM FINANCIAL SIMULATION PROCEDURES


The financial analysis in this study is conducted with the aid of a computerized

simulation model that projects the financial performance of a farm business over a four year

period. The model, called the Farm Financial Simulation Model (FFSM), was designed

specifically for use in a regional project study of which this analysis is a component

(Schnitkey, Barry, and Ellinger). Its purpose is to simulate the financial structure and

performance of a farm business over a transition period of four years with an emphasis placed

on the farm's financial components. Included among these components are the purchases and

sales of farm assets, financing terms, debt management, cash flows, tax obligations,

consumption levels, and growth rates. The financial emphasis makes the model applicable to a

broad range of farm types and other structural characteristics. In addition considerable detail

is allowed in the specification of production and marketing activities for crops and livestock.

These specifications of the FFSM allow a comprehensive assessment of a farm's

profitability, liquidity and solvency position based on simulated results reported in terms of a

set of coordinated financial statements. Included are a balance sheet, an income statement,

and statements for changes in net worth and fund availability. Also included in the model

output is a summary report containing financial ratios in each of the four years for the farm's

profitability, liquidity, and solvency. The financial measures are reported on a current market

value basis for the various classes of assets and can either include or exclude the effects of

contingent tax obligations. A detailed description of the model is available in Schnitkey, et.

al.








Basic Farm Description


The base farm modeled in this study is a mixed crop and livestock farm typical of the

Coastal Plains region of North Florida. Structural, production and financial values were

developed by a committee of farm management extension specialists.

The base farm is a 250 acre, owner-operated crop-livestock farm. Normal acreage includes

60 acres of peanuts, 100 acres of soybeans, and 60 acres of corn. In addition, a 40 cow herd

of beef cows is maintained.

The farmer participates in the government peanut and feed grain programs. The farm is

restricted to 30 acres of quota peanuts and grows 30 acres of additional. The feed grain

program reduces corn acreage by 17.5%. Deficiency payments are estimated to total $2847 in

1986 and 1987, $2488 in 1988, and $2115 in 1989. These calculations are based on a 60 acre

corn base, 65 bushel program yield, a $3.03 target price, and estimated market prices of $2.24,

$2.24, $2.33, and $2.42 in 1986 through 1989 respectively.

Other non-market sources of income include $1500 per year from custom work and

$10,000 per year of non-farm income. Family living expenses are assumed to be $10,000 in year

one and grow at the rate of 4% per year after that.

Average yields for this farm are 3500 lbs. per acre for quota peanuts, 2800 lbs. per acre

for additional, 65 bu. per acre for corn, and 25 bu. per acre for soybeans. Year one total

direct crop expenses per acre total $346 for quota peanuts, $219 for additional, $137 for corn,

and $129 for soybeans. Unallocated cash operating expenses total $10,840.

Machinery investment amounts to $160 per acre or $40,000 on a market value basis. A

$30 per acre replacement cost is assumed for new machinery and buildings purchases. A 25%

down payment is required on new machinery and building purchases. The balance is financed

on a five year constant principal note. Seven year straight line depreciation is assumed for all

machinery.








Brood cows are valued at $342 per head. Six year straight line depreciation is used. A

78% calf crop (includes pasture costs), a 10% cow replacement rate and a 2.5% cow death loss

are assumed. The calves are sold at weaning at an average value of $243.75. Non-feed costs

per breeding animal in year one are $34 and feed costs are $157.20.

Land is valued at $750 per acre. Buildings have a market value of $40,000. The initial

cash on hand is $2500. No storage facilities are available, so no crop inventories are

maintained.


Description of Scenarios


A variety of combinations of economic forecasts, beginning leverage positions, and

financial stress-relief policies were analyzed. Three economic outlooks were considered

including a most likely or base case, an optimistic outlook, and a pessimistic forecast.

Similarly, three beginning leverage positions were investigated: strong (20% debt to asset

ratio), stressed (40% debt to asset ratio), and extreme stress (70% debt to asset ratio). Table

1 reports the beginning balance sheet values for the three different leverage positions.

Seven policy options designed to reduce the financial pressure on the stressed and

extremely stressed cases were evaluated. The seven financial policy options are a 35% debt

reduction, a 35% equity infusion, a 2% interest rate write down, a two year deferral on all

loan interest and principal payments, sale of assets (land), sale of assets (land) with lease

back, and sale of livestock.


Economic Forecasts


The baseline economic scenarios were provided by the Food and Agricultural Policy

Research Institute (FAPRI) (Womack and Young). Some adjustments were made to reflect local

market conditions. Table 2 provides a summary of the economic variables input into the model.







Table 1: Beginning balance sheets at specified leverage positions.



Beginning balance sheets Low Medium High


ASSETS
Current Assets
Cash 2500 2500 2500
Marketable securities 0 0 0
Inventories
grain 0 0 0
livestock 0 0 0
Prepaid expenses 0 0 0
Investment in growing crop 0 0 0

Total Current Assets 2500 2500 2500

Intermediate Assets
Breeding stock 13680 13680 13680
Machinery 40000 40000 40000
Retirement accounts 0 0 0
Other 0 0 0

Total Intermediate Assets 53680 53680 53680

Fixed Assets
Building 40000 40000 40000
Land 187500 187500 187500
Other 0 0 0

Total Fixed Assets 227500 227500 227500
Total Assets 283680 283680 283680

LIABILITIES

Current loans 0 19375 38950
Inventory financing 0 0 0
Accounts payable 0 0 0
Accrued intermediate 0 533 1071
Accrued taxes 0 0 0
Current of interest and long 4474 8452 14690
Contingencies 0 0 0
Total Current Liabilities 4474 28360 54712

Intermediate loans 8571 25714 47143
Contingencies -1246 -1246 -1246
Total Intermediate Liabilities 7325 24468 45897

Long term loans 42635 58333 95667
Contingencies 2310 2310 2310
Total Long Term Liabilities 44945 60643 97977
Total Liabilities 56744 113472 198585

Net worth with contingencies 226936 170208 85095
Net worth without contingencies 228000 171272 86159









Table 2. Base economic variables.


---------------------Year----------------------

1986 1987 1988 1989

Commodity Prices
Peanuts (lb.) $ .23 $ .24 $ .25 $ .27
Corn (bu.) $2.30 $2.30 $2.39 $2.49
Soybeans (bu.) $5.10 $5.10 $5.36 $5.62

Interest Rate 11% 11% 11% 11%

Growth Rates in Percent

Production expenses 0.0 1.0 2.0 4.0
Overhead expenses 0.0 1.0 2.0 4.0
Machinery -10.0 -9.0 -11.0 -9.0
Buildings 0.0 0.0 0.0 0.0
Land 0.0 0.0 0.0 0.0
Family living 0.0 4.0 5.0 5.0
Purchased machinery 0.0 5.0 3.0 5.0



The optimistic and pessimistic economic scenarios were modeled by changing gross

revenues and land values. For the optimistic scenario, gross revenues and land values were

increased 20% over base levels. The pessimistic scenario was implemented by reducing gross

revenues and land values by 10% from the base. The increase in gross revenues was modeled

as a change in other farm income. The increase in land values was implemented during the

first year and thus does not affect the beginning balance sheet.

No single scenario is advanced to explain either the optimistic or pessimistic outlooks.

The changes were implemented in a manner consistent with a number of possible rationales

including: differing resource quality, differing management ability, or a change in the economic

outlook. This approach allows the results to be interpreted in a number of possible contexts.








Policy Options Input Adjustments


Debt Reduction and Equity Infusion


The intent of the debt reduction option was to decrease the farm's initial indebtedness

by 35% across all debt types. This strategy was implemented for the 40% leverage case by

reducing beginning short term liabilities by $22003, intermediate liabilities by $8571, and long

term liabilities by $9333.

The equity infusion option refers to the direct infusion of capital to reduce existing

indebtedness. This strategy is implemented by directly reducing short, intermediate, and long

term debt by 35%. This option differs from the debt reduction only in the tax treatment of

the proceeds. In the case of debt forgiveness the reductions are treated as taxable income,

whereas the direct equity infusions would not be taxable. For this particular example the

differences would be minimal for two reasons. First, there is no state income tax. Second,

with 40% or 70% leverage positions the net farm income is negative thus federal income taxes

would be zero.


Reduction in Interest Rates


Interest rates on all outstanding debt were reduced by 35% from 11% to 7.15%. This

option represents a possible government interest rate buydown.


Deferral of Debt Obligations


All scheduled payments of principal and interest were deferred for two years. There was

no accrual of interest in the interim. All payments commence in the third year at the original

payment plan. All interest payments on capital purchases made in years 1 and 2 were also

deferred until year 3.

The original and revised debt payment schedules are given in Table 3.








Table 3. Debt repayment schedules for the base and debt deferral options.


40% Leverage Case
Original debt schedule
Adjusted debt schedule

70% Leverage Case
Original debt schedule
Adjusted debt schedule


----------------Year------

1986 1987 1988

$25197 $26993 $28852
1157 2314 25468


$40877 $43844 $47011
1157 2314 40493


---------------

1989

$30740
26676


$50354
43245


Asset Sales No Lease Back


This restructuring option involves the sale of 35% of the farm's initial assets. This was

implemented by selling 125 acres of land at $750 per acre or $93750 and $8000 of machinery.

The proceeds from the asset sales were used to reduce outstanding debt.


Asset Sales Lease Back


This option involved selling 35% of the initial assets and then leasing back the assets

that were sold. This plan was implemented by selling 125 acres of land at $750 per acre or

$93750. No machinery sales are assumed. The land is leased back at $10 per acre cash rent.


Livestock Asset Sales No Lease Back


This restructuring option involved the sale of all livestock. This option was implemented

by selling the 40 brood cows for $342 per head or $13680. No other asset sales are assumed.










9








RESULTS AND DISCUSSION


The results of the fifteen scenarios evaluated are summarized, compared, and some

general implications are drawn1. Results presented include net income, net cash farm income,

non-farm income, return on assets, return on equity and the debt to asset ratio. Values are

presented for years 1 and 4 to provide some insight into the change in financial position over

time. Detailed financial outputs for each of the scenarios are provided in the appendix.


Alternative Economic Forecasts


The financial outlook for this farm under the baseline economic forecast is not very

encouraging. Net income including the $10000 of non-farm income, is only $830 in 1986 and

falls to $ -1506 in 1989 (Table 4). The rate of return on assets is 6% but with 11% interest

and 40% leverage, the return on equity is zero. The operator is clearly in a holding pattern,

living off of depreciation and non-farm income. Meanwhile the farm's leverage position slowly

erodes.

Not surprisingly, the pessimistic economic forecast is disastrous. The rate of return on

assets is only 3% and the rate of return on equity ranges from negative five to negative

twelve percent (Table 4). Net income ranges from -$7732 to -$14313. The farmer is forced to

live off of borrowed money; as a result the debt to asset ratio rapidly deteriorates in four

years from .46 to .63.

The optimistic case presents a relatively bright picture. The rate of return on assets is

in the neighborhood of the opportunity cost of capital at 10%, and the farm's net income

ranges from roughly $17000 to $22000 ( Table 4). The farm's equity position improves over

time as the debt to asset ratio falls from .30 to .20.



1Sixty-three scenarios were simulated (3 beginning leverage ratios 3 economic outlooks
* 7 policy options). Fifteen were chosen for inclusion in the report, the results of the others
are available from the authors.








Table 4: Financial summary measure for the base farma/
under three economic forecasts


----------------------Economic Forecast----------------------

Base Pessimistic k/ Optimistic ./
1986 1989 1986 1989 1986 1989


Net income ($)

Net income after gain ($)

Net cash farm income ($)

Non-farm income ($)


830

7580

1850

10000


Return on assets (%) .06

Return on equity no gain (5) 0.0

Return on equity with gain (%) .04

Debt-asset ratio .41


-1506

9327

3485

10000


.06

-.01

.06

.45


-7732

-19732

-6712

10000


.03

-.05

-.12

.46


-14313

-3480

-9323

10000


.03

-.12

-.03

.63


17021

61271

18041

10000


.11

.10

.36

.30


Aj/ 40 % debt to asset ratio, no policy option.

j/ Gross revenue and land values were reduced 10 percent.

g/ Gross revenue and land values were increased 20 percent.


22232

33065

27222

10000


.10

.09

.13

.20










Alternative Beginning Leverage Positions


The baseline analysis assumes a beginning leverage ratio of approximately 40%. As was

indicated earlier, under the most likely economic outlook this results in a "holding on"

situation where the rate of return on equity is zero and the debt to asset ratio slowly

deteriorates. As would be expected, a beginning leverage ratio of 70% spells doom under the

current economic outlook (Table 5). The rate of return on equity ranges from negative eleven

to negative thirty-three percent and net income ranges from negative $9000 to negative

$15000. The farmer is forced to live off of borrowed money and rapidly approaches bankruptcy

as the debt to asset ratio reaches 90%. This situation resembles the 40% leverage case under

the pessimistic forecast in terms of net income and returns on equity. The main difference is

that with 70% leverage to begin with, the farmer has less time before technically reaching

insolvency.

On the other hand, a beginning leverage position of 20% greatly improves the financial

outlook. Net income is approximately $7400 and the return on equity, while meager, is at least

positive (Table 5). As a result, the farmer is able to slightly improve his debt to asset ratio

and clearly can weather the current period of stress.


Policy Options that Modify Debt Parameters


The interest rate reduction, debt reduction, and debt deferral policy options were

designed to modify debt parameters in a manner that would improve the farm's chances of

weathering the next four years. The reduction in interest rates from 11% to 7.15% significantly

improves the farm's financial condition (Table 6). Net income rises, the return on equity

increases, and the debt to asset ratio falls slightly. As a result, the farmer is better able to

weather the next four years and looks to be in reasonable shape if the lower interest rates

prevail in the future.








Table 5: Financial summary measures for three beginning
leverage positions


----------------Beginning Leverage Position-------------------

High a/ Base B/ Low A/
1986 1989 1986 1989 1986 1989


Net income ($)

Net income after gain ($)

Net cash farm income ($)

Non-farm income ($)


Return on assets (%)

Return on equity no gain (5)

Return on equity with gain (W)

Debt-asset ratio


-9063

-2313

-8042

10000


.06

-.11

-.03

.74


-15436

-4603

-10446

10000


.06

-.33

-.10

.90


830

7580

1850

10000


.06

0.0

.04

.41


-1506

9327

3485

10000


.06

-.01

.06

.45


7329

14079

8349

10000


.06

.03

.06

.19


&/ Beginning debt to asset ratio

I/ Beginning debt to asset ratio

A/ Beginning debt to asset ratio


of 70 percent.

of 40 percent.

of 20 percent.


7523

18356

12514

10000


.06

.03

.08

.17


- -"I--`----








Table 6: Financial summary measures for the interest rate
reduction, debt reduction and debt deferral policy options.


-----------------------Policy Option-------------------------
Interest rate Debt Debt
reduction A/ Reduction b/ Deferral S/
1986 1989 1986 1989 1986 1989


Net income ($) 6502 6429 5478 5019 16598 2845

Net income after gain ($) 13252 17262 12228 15852 23348 13678

Net cash farm income ($) 7523 11416 6498 10019 17618 7835

Non-farm income ($) 10000 10000 10000 10000 10000 10000


Return on assets (%) .06 .06 .06 .06 .06 .06

Return on equity no gain (%) .04 .03 .03 .02 .10 .01

Return on equity with gain (%) .08 -.09 .06 .07 .14 .07

Debt-asset ratio .39 .35 .25 .23 .35 .31


Interest rates reduced from

Debt levels were reduced by


11 percent to 7.15 percent on all debt.

35 percent.


g/ Two year deferral on all principal and interest payments (See Table 3).










The 35% debt reduction strategy--either through debt forgiveness. or equity infusion--

significantly improves the financial position of the firm (Table 6). The debt to asset ratio falls

to .25 as a result of the debt reduction and the financial performance of the firm is very

similar to the low beginning equity case. The return on equity is still rather low, but the firm

is clearly in good enough shape to weather the current period of stress.

The debt deferral option appears to be a viable strategy if the economic outlook

improves in the next two to four years. During the two year deferral period, net income,

returns to equity, and the leverage ratio all dramatically improve (Table 6). However, once

debt payments commence the financial picture rapidly deteriorates again. The key to success is

an improved economic outlook at the end of the deferral period, otherwise the policy merely

prolongs the "holding on" capability.


Policy Options Based on Asset Sales


Three policy options used asset sales to reduce debt levels. As indicated in Table 7, the

two options based on the sale of land dramatically improved the farm's financial outlook. Net

income rose to over $10000, the rate of return on equity increased significantly, and the debt

to asset ratio fell to roughly 10%. These options clearly move the farm from the "holding on"

category to a reasonably secure category.

The livestock sale restructuring option results in a more modest improvement in the

financial outlook relative to the base case. Net income and returns to equity improve

modestly, and the debt to asset ratio drops in response to the asset liquidation (Table 7).

Overall, the farm is in a better position to weather a period of stress, but the farmer is still

living off of depreciation and non-farm income.








Table 7: Financial summary measures
for the three asset sales policy options.


----------------------Policy Option--------------------------
Asset sale with Asset sale Livestock sale
lease back a/ no lease back b/ no lease back j/
1986 1989 1986 1989 1986 1989


Net income ($)

Net income after gain ($)

Net cash farm income ($)

Non-farm income ($)


Return on assets (%)

Return on equity no gain (%)

Return on equity with gain (%)

Debt-asset ratio


9815

16565

10835

10000


.05

.06

.09

.14


10166

20998

15155

10000


.07

.05

.11

.11


16742

28607

18263

10000


.07

.10

.17

.11


17362

28289

22352

10000


.08

.08

.13

.09


4541

11291

5791

10000


.06

.03

.07

.36


A/ Sell 125 acres of land for $93750 and

./ Sell 125 acres of land for $93750 and

Q/ Sell 40 head of beef cows for $13680.


$8000 of machinery,

lease it back for $10 per acre.


4805

15638

9805

10000


.07

.03

.09

.35


- I -- I-- I I I I --II" I--~--










Policy Options that Modify Debt Parameters 70% Leverage Case


As indicated previously, the high beginning leverage case farm rapidly approaches

bankruptcy under the most likely economic scenario. The question is whether any of the policy

options can rescue a farm with this degree of financial stress. A reduction in interest rates

from 11% to 7.15% provides some improvement over the base case. Although net income

remains negative, the farmer is nearly able to make ends meet by living off of depreciation

and nonfarm income (Table 8). As a result, the return on equity is only slightly negative and

the deterioration in the debt to asset ratio is nearly controlled. Clearly the interest rate

reduction option doesn't "rescue" the highly leveraged farm, but it does allow him to hold on

for another four years.

The two year debt deferral option provides a brief respite. During the two deferral years

net income soars to over $16000 and the return on equity reaches nearly 20% (Table 8).

However, once debt payments commence again, the firm sustains net losses of over $8000 and

loses equity at a rate of 8% per year. In effect, the debt deferral option has bought the farm

another four years. Under the debt deferral option the debt to asset ratio is still in the

neighborhood of 70% in 1989 rather than having climbed to 90% as in the high leverage base

case. However, ultimate success depend on an improvement in the economic outlook by 1990

otherwise the financial position of the firm will rapidly deteriorate.

The 35% debt reduction option either through debt forgiveness or equity infusion reduces

the debt to asset ratio to .45. This option in effect converts the highly leveraged firm into

the base firm.


Policy Options Based on Asset Sales 70% Leverage Case


The asset sale without lease back option effectively "rescues" the highly leveraged firm.

Net income rises to approximately $9000, and the return on equity is a solid 8% or higher

(Table 9). The sale of assets with the associated debt liquidation reduces the debt to asset

17









Table 8: Financial summary measures for the base, interest rate reduction,
and debt deferral options under high leverage conditions. a/



Base Interest rate Debt
reductions h./ deferral c/
1986 1989 1986 1989 1986 1989


Net income ($) -9063 -15436 -172 -1475 16598 -8119

Net income after gain ($) -2313 -4603 6922 9358 23348 2714

Net cash farm income ($) -8042 -10446 1192 3616 17618 -3129

Non-farm income ($) 10000 10000 10000 10000 10000 10000


Return on assets (%) .06 .06 .06 .06 .06 .06

Return on equity no gain (%) -.11 -.33 0.0 -.02 .19 -.08

Return on equity with gain (%) -.03 -.10 .08 .12 .27 .03

Debt-asset ratio .74 .90 .71 .74 .65 .67


a/ Beginning debt to asset ratios were 70 percent.

./ Interest rates were reduced from 11 percent to 7.15 percent on all debt.

_/ All principal and interest payments were deferred for two years (See
Table 3).









ratio to .49 by the end of the first year. The debt to asset ratio continues to improve over

time in response to the favorable rate of return on equity.

The asset sale with lease back option merely buys time for the highly leveraged firm.

The sale of land quickly reduces the debt to asset ratio to .56 and significantly reduces the

rate of deterioration in the ratio over time (Table 9). However, by 1989 net income is negative

and the rate of increase in the debt to asset ratio is accelerating. The ultimate success of

this option depends on the economic outlook beginning in 1990.

The restructuring option involving the sale of livestock has little impact on the highly

leveraged firm. Net income remains between negative $5000 and negative $9000 (Table 9). The

farmer is still forced to live off of borrowed money and as a consequence the debt to asset

ratio increases to .82 (Table 9).









Table 9: Financial summary measures for the three asset sales
policy options under high leverage conditions. a/


-----------------------Policy Option--------------------------
Asset sale Asset sale Livestock sale
lease back b/ no lease back Q/ no lease back I/
1986 1989 1986 1989 1986 1989


Net income ($)

Net income after gain ($)

Net cash farm income ($)

Non-farm income ($)


358

7108

1378

10000


Return on assets (M) .05

Return on equity no gain (%) 0.0

Return on equity with gain (%) .08

Debt-asset ratio .56


-2257

8576

2733

10000


.08

-.03

.11

.63


9694

21558

9180

10000


.08

.11

.25

.49


8716

19643

13706

10000


.11

.08

.18

.40o


-5339

1411

-4089

10000


.06

-.06

.02

.71


Beginning debt to asset ratios of 70 percent.

Sell 125 acres of land for $93750 and $8000 of

Sell 125 acres of land for $93750 and lease it

Sell 40 head of beef cows for $13680.


machinery.

back for $10 per acre.


-9110

1723

-4110

10000


.07

-.15

.03

.82










CONCLUSIONS

The base farm analysis clearly supports observed conditions in the study area.

Agricultural land values have declined roughly 10% in the past year. Average land without a

peanut allotment or feed grain base is either sitting idle or being offered for rent at $10 or

less per acre. Soybean acreage in Florida was down 30% in 1985 and declined by another 26%

in 1986. The government peanut and feed grain programs provide the only reasonable income

prospects under current economic conditions.

Given the conditions, it is not too surprising to find that the typical or base farm is

essentially "holding on" under the current economic outlook. Farms with lower leverage ratios

(20% or so) either as a beginning condition or as the result of asset sales or debt reduction

appear to be in reasonably good shape under the most likely economic forecast. Likewise

farmers with above average land and management can likely survive in relatively good shape

even with leverage ratios of 40%.

For average farms with a beginning leverage ratio of roughly 40%, the debt deferral,

interest rate write down, and livestock sale policy options merely buy time". The ultimate

success of these policies depends upon an improvement in the economic outlook by 1990.

The below average farmer in terms of land and marketing skills or the average farmer

under pessimistic conditions is in real trouble. Likewise an average farmer with a beginning

debt to asset ratio of 70% is in real trouble under the most likely economic forecast.

The only policy option that effectively rescues the highly leveraged farmer is the asset

sale without lease back option. The asset sale with lease back, interest rate reduction and in

particular the debt deferral options "buy some time" but more than time will be needed to

save these farms. The economic outlook will have to significantly improve if these farms are

ultimately to survive. With a beginning debt to asset ratio of 70%, the livestock sale option is

"too little, too late".









REFERENCES


Anaman, Kwabena A. EconomicAnalsiof Fam-Firm Management Risk in North Florida.
Ph.d. Dissertation. University of Florida. 1985.

Economic Research Service, U.S.D.A. Financial Characteristics of U.S. Farms January 1,
1986. AIB Report 500. July 1986.

Schnitkey, Gary D., Peter J. Barry and Paul N. Ellinger. Farm Financial Simulation Model:
Documentation and User Guidelines. Department of Agricultural Economics Working
Paper. University of Illinois. 1986.

Womack, A.W. and R.E. Young III. An Analysis of the U.S. House of Representatives 1985
Farm Bill. FAPRI Staff Report #10-85. December 1985.















APPENDIX


Detailed Financial Summaries of the Various Scenarios








BASE ECONOMIC FORECAST, 40% LEVERAGE CASE


SUMMARY SHEET

Beg. Year 1 Year 2 Year 3 Year 4

Net income 830 -788 -581 -1506
Net income after gain 7580 8617 8564 9327
Net income from operations 6598 5704 6640 6498
Cash income from operations 11903 13489 15524 16505
Maximum current loan 63503 73965 85892 99605
Changes in net worth with cont. -3768 -2605 -3833 -3219


RATIO ANALYSIS WITH CONTINGENCIES
Return on assets
Return on debt
Return on equity without gain
Return on equity with gain


Current ratio
Intermediate ratio
Fixed ratio
Debt to asset ratio

Interest coverage ratio
Cash flow coverage ratio
Debt to income ratio


0.0882
2.1939
3.7514
0.4000


0.0585
0.1237
0.0049
0.0445

0.0061
2.5292
3.8935
0.4148

1.05
3.21
14.97


RATIO ANALYSIS WITHOUT CONTINGENCIES
Return on assets 0.0585
Return on debt 0.1248
Return on equity without gain 0.0048
Return on equity with gain 0.0443

Current ratio 0.0882 0.0061
Intermediate ratio 2.0876 2.3527
Fixed ratio 3.9000 4.1746
Debt to asset ratio 0.3962 0.4063


NA denotes a ratio that is infinite


0.0552
0.1244
-0.0047
0.0518

0.0047
2.8481
4.1480
0.4308

0.95
3.08
13.69


0.0552
0.1270
-0.0047
0.0510

0.0047
2.7078
4.4835
0.4195


0.0578
0.1236
-0.0035
0.0523

0.0083
3.3624
4.3985
0.4492

0.97
2.99
14.48


0.0578
0.1269
-0.0035
0.0513

0.0083
3.2616
4.8693
0.4330


0.0568
0.1228
-0.0094
0.0583

0.0112
3.7912
4.7030
0.4669

0.92
2.92
13.99


0.0568
0.1274
-0.0091
0.0566

0.0112
3.8643
5.2731
0.4473







OPTIMISTIC ECONOMIC FORECAST, 40% LEVERAGE CASE


SUMMARY SHEET

Beg. Year 1 Year 2 Year 3 Year 4

Net income 17021 17713 20467 22232
Net income after gain 61271 27118 29613 33065
Net income from operations 21703 21196 22702 23157
Cash income from operations 11903 13489 15524 1I501
Maximum current loan 55633 48786 40870 32059
Changes in net worth with cont. 46371 14441 16079 20107

RATIO ANALYSIS WITH CONTINGENCIES
Return on assets 0.1118 0.0969 0.1005 0.0986
Return on debt 0.1152 0.1139 0.1155 0.1092
Return on equity without gain 0.1000 0.0818 0.0886 0.0900
Return on equity with gain 0.3600 0.1252 0.1282 0.1338

Current ratio 0.0882 0.0108 0.0165 0.6596 1.6962
Intermediate ratio 2.1939 2.5613 2.9067 3.4025 3.7641
Fixed ratio 3.7514 -4.2537 4.3951 4.5610 4.8305
Debt to asset ratio 0.4000 0.3272 0.2899 0.2649 0.2380

Interest coverage ratio 2.16 2.31 2.67 3.03
Cash flow coverage ratio 3.30 3.40 3.57 3.74
Debt to income ratio 1.85 3.88 3.18 2.69

RATIO ANALYSIS WITHOUT CONTINGENCIES
Return on assets 0.1118 0.0969 0.1005 0.0986
Return on debt 0.1162 0.1208 0.1265 0.1243
Return on equity without gain 0.0994 0.0796 0.0855 0.0862
Return on equity with gain 0.3577 0.1219 0.1238 0.1282

Current ratio 0.0882 0.0108 0.0166 0.6631 1.7067
Intermediate ratio 2.0876 2.3527 2.7078 3.2616 3.8643
Fixed ratio 3.9000 4.8552 5.2066 5.6463 6.1057
Debt to asset ratio 0.3962 0.3087 0.2645 0.2326 0.2028

NA denotes a ratio that is infinite







PESSIMISTIC ECONOMIC FORECAST, 40% LEVERAGE CASE


SUMMARY SHEET

Beg. Year 1 Year 2 Year 3 Year 4


Net income
Net income after gain
Net income from operations
Cash income from operations
Maximum current loan
Changes in net worth with cont.

RATIO ANALYSIS WITH CONTINGENCIES
Return on assets
Return on debt
Return on equity without gain
Return on equity with gain


Current ratio
Intermediate ratio
Fixed ratio
Debt to asset ratio


0.0882
2.1939
3.7514
0.4000


Interest coverage ratio
Cash flow coverage ratio
Debt to income ratio


-7732
-19732
-1390
11903
67739
-29317


0.0304
0.1282
-0.0454
-0.1159

0.0050
2.4575
3.7257
0.4697


0.53
3.17
-5.75


RATIO ANALYSIS WITHOUT CONTINGENCIES
Return on assets 0.0304
Return on debt 0.1294
Return on equity without gain -0.0451
Return on equity with gain -0.1152

Current ratio 0.0882 0.0050
Intermediate ratio 2.0876 2.3527
Fixed ratio 3.9000 3.8343
Debt to asset ratio 0.3962 0.4672


NA denotes a ratio that is infinite


-10573
-1168
-2477
13489
88108
-12802


0.0283
0.1291
-0.0750
-0.0083

0.0107
2.8481
3.9076
0.5248

0.42
2.93
-106.81


0.0283
0.1298
-0.0747
-0.0083

0.0107
2.7078
4.1219
0.5178


-11787
-2642
-1790
15524
111228
-14366


0.0305
0.1258
-0.0920
-0.0206

0.0142
3.3476
4.2121
0.5827

0.41
2.76
-53.55


0.0305
0.1275
-0.0907
-0.0203

0.0142
3.2616
4.4808
0.5728


-14313
-3 -2194
16505
137828
-16474


0.0: ,-,.
0.12, .'
-0.1).. '
-0.0306

0.0168
3.7912
4.4711
0.6483

0. 1
2.60
-45.63


0.0286
0.1261
-0.1230
-0.0299

0.01 a5.
3.8643
4.8568
0.6330







BASE ECONOMIC FORECAST, 20% LEVERAGE CASE


SUMMARY SHEET

Beg. Year 1 Year 2 Year 3 Year 4

Net income 7329 6451 7491 7523
Net income after gain 14079 15856 16637 18356
Net income from operations 6598 5704 6640 6498
Cash income from operations 11903 13489 15524 1650:
Maximum current loan 42470 41862 41937 42918
Changes in net worth with cont. 2730 4635 4239 5810

RATIO ANALYSIS WITH CONTINGENCIES
Return on assets 0.0585 0.0545 0.0568 0.105,
Return on debt 0.1454 0.1409 0.1392 0.1377
Return on equity without gain 0.0323 0.0281 0.0320 0.0315
Return on equity with gain 0.0620 0.0690 0.0710 0.0770

Current ratio 0.5588 0.5780 0.6524 0.7196 0.8135
Intermediate ratio 7.3280 7.5927 6.9619 7.0668 6.8392
Fixed ratio 5.0618 5.1690 5.4584 5.7187 6.0606
Debt to asset ratio 0.2000 0.2029 0.1998 0.1957 0.1865

Interest coverage ratio 1.79 1.70 1.82 1.84
Cash flow coverage ratio 5.43 5.18 5.05 4.96
Debt to income ratio 4.03 3.69 3.52 3.16

RATIO ANALYSIS WITHOUT CONTINGENCIES
Return on assets 0.0585 0.0545 0.0568 0.0556
Return on debt 0.1482 0.1469 0.1473 0.1498
Return on equity without gain 0.0321 0.0278 0.0315 0.0309
Return on equity with gain 0.0617 0.0683 0.0700 0.0755

Current ratio 0.5588 0.5815 0.6558 0.7236 0.8184
Intermediate ratio 6.2627 6.1971 6.1794 6.6356 7.0807
Fixed ratio 5.3360 5.6765 6.0545 6.5410 7.0418
Debt to asset ratio 0.1963 0.1945 0.1887 0.1798 0.1672


NA denotes a ratio that is infinite







BASE ECONOMIC FORECAST, 70% LEVERAGE CASE


SUMMARY SHEET

Beg. Year 1 Year 2 Year 3 Ye-.- 4
Net income -9063 -11884 -13016 -154.-h
Net income after gain -2313 -2479 -3870 -4603
Net income from operations 6598 5704 6640 6498
Cash income from operations 11903 13489 15524 l15tb
Maximum current loan 84753 112258 142822 177327
Changes in net worth with cont. -13661 -13701 -16267 -17149


RATIO ANALYSIS WITH CONTINGENCIES
Return on assets
Return on debt
Return on equity without gain
Return on equity with gain


Current ratio
Intermediate ratio
Fixed ratio
Debt to asset ratio

Interest coverage ratio
Cash flow coverage ratio
Debt to income ratio


0.0457
1.1696
2.3220
0.7000


0.0585
0.1150
-0.1065
-0.0272

0.0117
1.3794
2.4536
0.7495

0.65
1.98
-85.87


RATIO ANALYSIS WITHOUT CONTINGENCIES
Return on assets 0.0585
Return on debt 0.1156
Return on equity without gain -0.1052
Return on equity with gain -0.0268


Current ratio
Intermediate ratio
Fixed ratio
Debt to asset ratio


0.0457
1.1387
2.3780
0.6963


0.0117
1.3252
2.5623
0.7410


0.0551
0.1149
-0.1664
-0.0347

0.0151
1.6381
2.6405
0.8004

0.57
1.90
-86.18


0.0551
0.1162
-0.1609
-0.0336

0.0151
1.5907
2.7726
0.7892


0.0575
0.1140
-0.2254
-0.0670

0.0172
2.0314
2.8395
0.8582

0.56
1.84
-59.82


0.0575
0.1156
-0.2135
-0.0635

0.0172
1.9941
3.0285
0.8421


0.1133
-0.
-0.11

0.019 9
2. % .
3.3013
0.9.1"


0 ..




0.1154
-0.3343
-0.0997

0. 0 !.iA
2.4768
3.3016
0.8963b


NA denotes a ratio that is infinite








BASE ECONOMIC FORECAST, 40% LEVERAGE, 35% DEBT REDUCTION CASE


SUMMARY SHEET

Beg. Year 1 Year 2 Year 3 Year 4

Net income 5478 4413 5245 :'19
Net income after gain 12228 13818 14390 15:'
Net income from operations 6598 5704 6640 64/-
Cash income from operations 11903 13489 15524 IL -
Maximum current loan 42470 45807 50025 55369
Changes in net worth with cont. 880 2597 1993 3306


RATIO ANALYSIS WITH CONTINGENCIES
Return on assets
Return on debt
Return on equity without gain
Return on equity with gain


Current ratio
Intermediate ratio
Fixed ratio
Debt to asset ratio


0.3933
3.3768
4.4338
0.2593


Interest coverage ratio
Cash flow coverage ratio
Debt to income ratio

RATIO ANALYSIS WITHOUT CONTINGENCIES
Return on assets
Return on debt
Return on equity without gain
Return on equity with gain


Current ratio
Intermediate ratio
Fixed ratio
Debt to asset ratio


0.3933
3.1313
4.6429
0.2556


0.0585 0.0552 0.0578
0.1345 0.1369 0.1366
0.0261 0.0209 0.0246
0.0582 0.0655 0.0674


0.0263
3.7945
4.5629
0.2581

1.49
4.34
6.02


0.0585
0.1365
0.0259
0.0579

0.0265
3.4106
4.9538
0.2496


0.0183
4.0424
4.8386
0.2579

1.39
4.18
5.31


0.0552
0.1415
0.0207
0.0648

0.0184
3.7656
5.3013
0.2466


0.0145
4.5567
5.0982
0.2572

1.46
4.08
5.16


0.0578
0.1429
0.0242
0.0664

0.0146
4.3734
5.7417
0.2409


NA denotes a ratio that is infinite


0. 69
0. 33
0.0735

0. '
4.0 "
5.4: ;
0. '.-, 14

1.44
4.01
4.71



0.1461

0 ,

0.
4..
6.1987
0.2 :


I







BASE ECONOMIC FORECAST, 40% LEVERAGE, 35% INTEREST RATE REDUCTION CASE


SUMMARY SHEET

Beg. Year 1 Year 2 Year 3 Year 4
Net income 6502 5574 6529 6429
Net income after gain 13252 14979 15674 17262
Net income from operations 6598 5704 6640 6498
Cash income from operations 11903 13489 15524 16505
Maximum current loan 62455 66843 71960 78061
Changes in net worth with cont. 1904 3757 3277 4716

RATIO ANALYSIS WITH CONTINGENCIES
Return on assets 0.0585 0.0552 0.0578 0.0'^
Return on debt 0.0793 0.0804 0.0805 0.,(08
Return on equity without gain 0.0382 0.0323 0.0371 0.0358
Return on equity with gain 0.0778 0.0869 0.0890 0.0963

Current ratio 0.0887 0.0073 0.0063 0.0058 0.0056
Intermediate ratio 2.1939 2.5292 2.8481 3.3624 3.7912
Fixed ratio 3.7514 3.8935 4.1480 4.3985 4.7030
Debt to asset ratio 0.3993 0.3942 0.3883 0.3821 0.3730

Interest coverage ratio 1.64 1.55 1.65 1.64
Cash flow coverage ratio 4.11 3.99 3.93 3.89
Debt to income ratio 8.55 7.48 7.13 6.42

RATIO ANALYSIS WITHOUT CONTINGENCIES
Return on assets 0.0585 0.0552 0.0578 0.0568
Return on debt 0.0801 0.0822 0.0829 0.0844
Return on equity without gain 0.0379 0.0319 0.0364 0.0349
Return on equity with gain 0.0773 0.0857 0.0874 0.0938

Current ratio 0.0887 0.0073 0.0063 0.0058 0.005r
Intermediate ratio 2.0876 2.3527 2.7078 3.2616 3.8643
Fixed ratio 3.9000 4.1746 4.4835 4.8693 5.2731
Debt to asset ratio 0.3956 0.3857 0.3771 0.3658 0.3533


NA denotes a ratio that is infinite







BASE ECONOMIC FORECAST, 40% LEVERAGE, 2 YEAR DEBT DEFFERAL CASE-


SUMMARY SHEET

Beg. Year 1 Year 2 Year 3 Year 4

Net income 16598 15704 3096 2845
Net income after gain 23348 25109 12241 13678
Net income from operations 6598 5704 6640 6498
Cash income from operations 11903 13489 15524 16505
Maximum current loan 60554 46250 33445 43213
Changes in net worth with cont. 11999 13888 -156 1132

RATIO ANALYSIS WITH CONTINGENCIES
Return on assets 0.0585 0.0552 0.0553 0.0557
Return on debt 0.0000 0.0000 0.1156 0.1217
Return on equity without gain 0.0972 0.0859 0.0157 0.0145
Return on equity with gain 0.1367 0.1374 0.0623 0.0696

Current ratio 0.1290 0.0539 1.1120 0.4804 0.0176
Intermediate ratio 1.8669 1.8064 1.9735 2.2060 2.4252
Fixed ratio 3.5103 3.4121 3.6111 3.8050 4.0403
Debt to asset ratio 0.3981 0.3575 0.3465 0.3369 0.3269

Interest coverage ratio NA NA 1.23 1.21
Cash flow coverage ratio 69.96 35.91 3.39 3.36
Debt to income ratio 4.84 4.05 8.52 7.30

RATIO ANALYSIS WITHOUT CONTINGENCIES
Return on assets 0.0585 0.0552 0.0553 0.0tO3'
Return on debt 0.0000 0.0000 0.1193 0.1278
Return on equity without gain 0.0966 0.0848 0.0155 0.0141
Return on equity with gain 0.1359 0.1356 0.0612 0.0680

Current ratio 0.1290 0.0544 1.1159 0.4822 0.0176
Intermediate ratio 1.7893 1.7146 1.9051 2.1622 2.4549
Fixed ratio 3.6400 3.6261 3.8627 4.1523 4.4539
Debt to asset ratio 0.3944 0.3490 0.3358 0.3210 0.3071


NA denotes a ratio that is infinite








BASE ECONOMIC FORECAST, 40% LEVERAGE, ASSET SALE--NO LEASE BACK CASE


SUMMARY SHEET

Beg. Year 1 Year 2 Year 3 Year 4


Net income
Net income after gain
Net income from operations
Cash income from operations
Maximum current loan
Changes in net worth with cont.

RATIO ANALYSIS WITH CONTINGENCIES
Return on assets
Return on debt
Return on equity without gain
Return on equity with gain


Current ratio
Intermediate ratio
Fixed ratio
Debt to asset ratio


0.0882
2.1939
3.7514
0.4000


Interest coverage ratio
Cash flow coverage ratio
Debt to income ratio

RATIO ANALYSIS WITHOUT CONTINGENCIES
Return on assets
Return on debt
Return on equity without gain
Return on.equity with gain


Current ratio
Intermediate ratio
Fixed ratio
Debt to asset ratio


0.0882
2.0876
3.9000
0.3962


16742
28607
12435
16140
13609
19536


0.0717
0.0260
0.0984
0.1681

3.7553
3.3110
78.8484
0.1137


6.25
8.04
3.97


0.0717
0.0262
0.0978
0.1670


3.7788
3.0036
NA
0.1131


18511
26432
11749
17934
3021
15647


0.1016
0.1184
0.0976
0.1393

6.6440
3.4911
48.4893
0.1039

6.72
8.26
0.92


0.1016
0.1190
0.0975
0.1392

6.6748
3.3409
82.9124
0.1016


18295
26769
11516
19601
0
15387


0.0939
0.1204
0.0891
0.1303

7.6642
4.0118
31.6060
0.0997

6.68
7.63
0.89


0.0939
0.1231
0.0888
0.1300

7.6952
3.9024
45.0115
0.0957


17362
28289
10603
20613
0
15267


0.0840
0.1180
0.0786
0.1281

10.4578
4.4708
20.9352
0.0962

6.36
7.07
0.86


0.0840
0.1229
0.0783
0.1276

10.5367
4.4936
32.4022
0.0865


NA denotes a ratio that is infinite








BASE ECONOMIC FORECAST, 40% LEVERAGE, ASSET SALE WITH LEASE BACK CASE

SUMMARY SHEET

Beg. Year 1 Year 2 Year 3 Year 4

Net income 9815 9009 10106 10166
Net income after gain 16565 18414 19251 20998
Net income from operations 5348 4442 5352 5158
Cash income from operations 10653 12227 14237 15166
Maximum current loan 33927 30246 26977 24399
Changes in net worth with cont. 7530 7513 7840 7912

RATIO ANALYSIS WITH CONTINGENCIES
Return on assets 0.0541 0.0699 0.0715 0.0683
Return on debt 0.0434 0.1666 0.1584 0.1536
Return on equity without gain 0.0577 0.0507 0.0546 0.0526
Return on equity with gain 0.0973 0.1036 0.1039 0.1087


Current ratio
Intermediate ratio
Fixed ratio
Debt to asset ratio


0.0882
2.1939
3.7514
0.4000


Interest coverage ratio
Cash flow coverage ratio
Debt to income ratio

RATIO ANALYSIS WITHOUT CONTINGENCIES
Return on assets
Return on debt
Return on equity without gain
Return on equity with gain


Current ratio
Intermediate ratio
Fixed ratio
Debt to asset ratio


0.0882
2.0876
3.9000
0.3962


2.7612
2.4575
129.0246
0.1403


2.77
7.26
6.85


0.0541
0.0438
0.0573
0.0967


2.7731
2.3527
NA
0.1399


NA denotes a ratio that is infinite


3.0360
2.7919
48.4893
0.1373

2.66
7.24
1.58


0.0699
0.1672
0.0507
0.1035

3.0472
2.7078
82.9124
0.1345


3.2755
3.3136
31.6060
0.1303

2.93
7.03
1.53


0.0715
0.1617
0.0544
0.1036

3.2865
3.2616
45.0115
0.1254


4.2967
3.8015
20.9352
0.1243

3.04
6.88
1.38


0.0683
0.1596
0.0524
0.1081

4.3244
3.8643
32.4022
0.1124







BASE ECONOMIC FORECAST, 40% LEVERAGE, LIVESTOCK SALE--NO LEASE BACK CASE

SUMMARY SHEET

Beg. Year 1 Year 2 Year 3 Year 4
Net income 4541 3724 4677 4805
Net income after gain 11291 13129 13822 15638
Net income from operations 8352 7791 8922 9180
Cash income from operations 15255 16944 19184 20565
Maximum current loan 45681 51931 58993 66943
Changes in net worth with cont. 1508 1513 2244 3392

RATIO ANALYSIS WITH CONTINGENCIES
Return on assets 0.0647 0.0658 0.0691 0.0694
Return on debt 0.1083 0.1267 0.1259 0.1269
Return on equity without gain 0.0267 0.0217 0.0270 0.0274
Return on equity with gain 0.0663 0.0765 0.0798 0.0891

Current ratio 0.0882 0.0000 0.0000 0.0000 0.0000
Intermediate ratio 2.1939 1.8886 2.2735 2.7260 3.1763
Fixed ratio 3.7514 3.9982 4.1480 4.4601 4.7767
Debt to asset ratio 0.4000 0.3652 0.3676 0.3649 0.3604

Interest coverage ratio 1.33 1.26 1.33 1.33
Cash flow coverage ratio 3.68 3.07 3.04 3.02
Debt to income ratio 10.05 7.52 7.28 6.45

RATIO ANALYSIS WITHOUT CONTINGENCIES
Return on assets 0.0647 0.0658 0.0691 0.0694
Return on debt 0.1093 0.1278 0.1286 0.1304
Return on equity without gain 0.0265 0.0216 0.0267 0.0270
Return on equity with gain 0.0659 0.0761 0.0789 0.0878

Current ratio 0.0882 0.0000 0.0000 0.0000 0.0000
Intermediate ratio 2.0876 1.7587 2.0354 2.4500 2.9172
Fixed ratio 3.9000 4.1746 4.4835 4.8693 5.2731
Debt to asset ratio 0.3962 0.3621 0.3600 0.3551 0.3478


NA denotes a ratio that is infinite








BASE ECONOMIC FORECAST, 70% LEVERAGE, 35% INTEREST RATE REDUCTION CASE


SUMMARY SHEET

Beg. Year 1 Year 2 Year 3 Year 4

Net income 172 -1244 -812 -1475
Net income after gain 6922 8161 8333 9358
Net income from operations 6598 5704 6640 6498
Cash income from operations 11903 13489 15524 16505
Maximum current loan 83105 100520 119168 139342
Changes in net worth with cont. -4427 -3060 -4064 -3188


RATIO ANALYSIS WITH CONTINGENCIES
Return on assets
Return on debt
Return on equity without gain
Return on equity with gain


Current ratio
Intermediate ratio
Fixed ratio
Debt to asset ratio

Interest coverage ratio
Cash flow coverage ratio
Debt to income ratio


0.0460
1.1696
2.3220
0.6987


0.0585
0.0738
0.0020
0.0810

0.0076
1.3794
2.4536
0.7154

1.01
2.53
28.64


RATIO ANALYSIS WITHOUT CONTINGENCIES
Return on assets 0.0585
Return on debt 0.0742
Return on equity without gain 0.0020
Return on equity with gain 0.0800

Current ratio 0.0460 0.0076
Intermediate ratio 1.1387 1.3252
Fixed ratio 2.3780 2.5623
Debt to asset ratio 0.6950 0.7069


NA denotes a ratio that is infinite


0.0552
0.0741
-0.0154
0.1007

0.0092
1.6381
2.6405
0.7296

0.93
2.47
24.96


0.0552
0.0749
-0.0149
0.0978

0.0092
1.5907
2.7726
0.7184


0..0577
0.0738
-0.0104
0.1069

0.0104
2.0314
2.8395
0.7461

0.95
2.44
25.25


0.0577
0.0750
-0.0100
0.1026

0.0104
1.9941
3.0285
0.7299


0.0567
0.0737
-0.0200
0.1266

0.0115
2.4466
3.0686
0.7600

0.92
2.43
23.21


0.0567
0.0753
-0.0188
0.1190

0.0115
2.4768
3.3016
0.7404








BASE ECONOMIC FORECAST, 70% LEVERAGE, 2 YEAR DEBT DEFERRAL CASE


SUMMARY SHEET

Beg. Year 1 Year 2 Year 3 Year 4

Net income 16598 15704 -6476 -8119
Net income after gain 23348 25109 2669 2714
Net income from operations 6598 5704 6640 6498
Cash income from operations 11903 13489 15524 16505
Maximum current loan 80129 65825 54066 80598
Changes in net worth with cont. 11999 13888 -9728 -9832


RATIO ANALYSIS WITH CONTINGENCIES
Return on assets
Return on debt
Return on equity without gain
Return on equity with gain


Current ratio
Intermediate ratio
Fixed ratio
Debt to asset ratio

Interest coverage ratio
Cash flow coverage ratio
Debt to income ratio


0.0642
0.9986
2.1706
0.6963


RATIO ANALYSIS WITHOUT CONTINGENCIES
Return on assets
Return on debt
Return on equity without gain
Return on equity with gain


Current ratio
Intermediate ratio
Fixed ratio
Debt to asset ratio


0.0642
0.9760
2.2195
0.6925


0.0585
0.0000
0.1926
0.2710

0.0096
0.9852
2.1414
0.6548

NA
69.96
8.46


0.0585
0.0000
0.1903
0.2677

0.0097
0.9572
2.2238
0.6464


0.0552
0.0000
0.1600
0.2558

0.0093
1.1164
2.2857
0.6107

NA
35.91
7.42


0.0552
0.0000
0.1561
0.2496

0.0093
1.0942
2.3840
0.5994


0.0578
0.1171
-0.0578
0.0238

0.0049
1.2852
2.4371
0.6474

0.72
2.13
65.85


0.0578
0.1192
-0.0562
0.0232

0.0049
1.2702
2.5750
0.6312


0.0568
0.1166
-0.0793
0.0265

0.0092
1.4710
2.6105
0.6854

0.67
2.07
69.24


0.0568
0.1196
-0.0759
0.0254

0.0092
1.4819
2.7771
0.6657


NA denotes a ratio that is infinite







BASE ECONOMIC FORECAST, 70% LEVERAGE, ASSET SALE--NO LEASE BACK CASE


SUMMARY SHEET


Beg.

Net income
Net income after gain
Net income from operations
Cash income from operations
Maximum current loan
Changes in net worth with cont.

RATIO ANALYSIS WITH CONTINGENCIES
Return on assets
Return on debt
Return on equity without gain
Return on equity with gain


Current ratio
Intermediate ratio
Fixed ratio
Debt to asset ratio


0.0457
1.1696
2.3220
0.7000


Year 1 Year 2 Year 3 Year 4


9694
21558
12435
16140
66356
12540


0.0789
0.0568
0.1139
0.2533

0.0133
1.5402
13.2412
0.4855


Interest coverage ratio 1.77
Cash flow coverage ratio 3.08
Debt to income ratio 9.21

RATIO ANALYSIS WITHOUT CONTINGENCIES
Return on assets 0.0789
Return on debt 0.0571
Return on equity without gain 0.1125
Return on equity with gain 0.2502


Current ratio
Intermediate ratio
Fixed ratio
Debt to asset ratio


0.0457
1.1387
2.3780
0.6963


0.0133
1.4966
14.7554
0.4851


9229
17150
11749
17934
67665
6314


0.1146
0.1209
0.0945
0.1757

0.0129
1.8224
12.2.468
0.4622

1.74
3.07
5.37


0.1146
0.1210
0.0944
0.1755

0.0129
1.7806
13.6814
0.4595


9283
17757
11516
19601
68825
6375


0.1113
0.1219
0.0893
0.1708

0.0125
2.2461
11.6062
0.4366

1.76
3.08
5.03


0.1113
0.1226
0.0889
0.1700

0.0125
2.2114
13.0314
0.4316


8716
19643
10603
20611
70607
6620


0.1052
0.1238
0.0790
0.1780

0.0127
2.7106
10.3511
0.4130

1.73
3.10
4.35


0.1052
0.1252
0.0783
0.1765

0.0127
2.7189
12.5464
0.4003


NA denotes a ratio that is infinite







BASE ECONOMIC FORECAST, 70% LEVERAGE, ASSET SALE WITH LEASE BACK CASE


SUMMARY SHEET


Beg.

Net income
Net ircoim after gain
Net income from operations
Cash income from operations
Maximum current loan
Changes in net worth with cont.

RATIO ANALYSIS WITH CONTINGENCIES
Return on 3:.-.ts
Returr on debt
Return oni xcuity without gain
Return on equity with gain


Current ratio
Intermediate ratio
Fixed ratio
Debt to asset ratio

Interest coverage ratio
Cash flow coverage ratio
Debt to income ratio


0.0457
1.1696
2.3220
0.7000


Year 1 Year 2 Year 3 Year 4


358
7108
5348
10653
86045
-1927


0.0541
0.0672
0.0042
0.0835

0.0085
1.3578
13.2412
0.5644


1.02
3.35
27.94


RATIO ANALYSIS WITHOUT CONTINGENCIES
Return on assets 0.0541
Return on debt 0.0675
Return on equity without gain 0.0042
Return on equity with gain 0.0825


Current ratio
Intermediate ratio
Fixed ratio
Debt to asset ratio


0.0457
1.1387
2.3780
0.6963


0.0085
1.3252
14.7554
0.5639


-1331
8074
4442
12227
96794
-2828


0.0756
0.1303
-0.0160
0.0971

0.0109
1.6194
12.2468
0.5871


0.92
3.21
13.35


0.0756
0.1304
-0.0160
0.0970

0.0109
1.5907
13.6814
0.5840


-1209
7937
5352
14237
108901
-3475


0.0789
0.1290
-0.0150
0.0988

0.0126
2.0135
11.6062
0.6103


0.93
3.12
14.39


0.0789
0.1297
-0.0149
0.0981

0.0127
1.9941
13.0314
0.6048


-2257
8576
5158
15166
122736
-4511


0.0768
0.1287
-0.0294
0.1116

0.0145
2.4509
10.3511
0.6398


0.87
3.05
14.04


0.0768
0.1299
-0.0289
0.1100

0.0145
2.4768
12.5464
0.6263


NA denotes a ratio that is infinite








BASE ECONOMIC FORECAST, 70% LEVERAGE, LIVESTOCK SALE--NO LEASE BACK CASE


SUMMARY SHEET

Beg. Year 1 Year 2 Year 3 Year 4


Net income
Net income after gain
Net income from operations
Cash income from operations
Maximum current loan
Changes in net worth with cont.

RATIO ANALYSIS WITH CONTINGENCIES
Return on -;s.ts
Return on du.st
Return on equity without gain
Return on equity with gain


Current ratio
Intermediate ratio
Fixed ratio
Debt to asset ratio

Interest coverage ratio
Cash flow coverage ratio
Debt to income ratio


0.0457
1.1696
2.3220
0.7000


-5339
1411
8352
15255
66931
-8372


0.0647
0.1062
-0.0627
0.0166

0.0039
1.0305
2.4948
0.7166

0.77
2.22
140.71


RATIO ANALYSIS WITHOUT CONTINGENCIES
Return on assets 0.0647
Return on debt 0.1067
Return on equity without gain -0.0620
Return on equity with gain 0.0164


Current ratio 0.0457 0.0039
Intermediate ratio 1.1387 0.9906
Fixed ratio 2.3780 2.5623
Debt to asset ratio 0.6963 0.7135


NA denotes a ratio that is infinite


-7354
2051
7791
16944
90210
-9565


0.0657
0.1153
-0.0959
0.0267

0.0096
1.2741
2.6405
0.7556

0.71
1.83
94.61


0.0657
0.1159
-0.0948
0.0264

0.0096
1.1957
2.7726
0.7481


-7741
1404
8922
19184
115568
-10174


0.0689
0.1143
-0.1153
0.0209

0.0129
1.5968
2.8650
0.7948

0.71
1.79
147.81


0.0689
0.1155
-0.1118
0.0203

0.0129
1.4979
3.0285
0.7850


-9110
1723
9180
20565
143228
-10523


0.0691
0.1140
-0.1599
0.0302

0.0155
1.9729
3.0999
0.8351

0.68
1.76
128.14


0.0691
0.1155
-0.1526
0.0289

0.0155
1.8697
3.3016
0.8227


- -i--




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