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Return on equity as a farming operation matures
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trac8100
Posted 11/27/2015 13:11 (#4922256 - in reply to #4922001)
Subject: RE: Return on equity as a farming operation matures


EC Kansas
AS someone said sometime, depends on what the definition of "is" is.

On total equity, land and farming inputs, high ROEs were not hard to achieve the last several years if one was able to raise decent crop and not have adverse weather situations, drought, too much wet or whatever.

From a college economics perspective, the inputs for farming, or raising a crop, are: Land, machinery, labor and inputs (seed, fert/chem, etc.). The land cost would be figured as rent for the farmer, so if the farmer owns all his land, he should allocate rent as a return on his land ownership and his cost of land for the farming enterprise. If the farmer is renting all or part of his land, the cost allocation is still rent, whatever it is, cash or share. Once that variable is determined, the balance of cash flow would be the ROE on farming inputs.

Return on equity should be figured on market values for land and equipment. That is your equity, MV minus debt.

Return on investment would be what you paid for machinery and land if your figuring return to the land. Return on Investment is different than on equity. Equity being your net worth number on your market value based balance sheet.

Return to land is based on capitalization rate which is the net return to the landowner, gross rents minus expenses. Current cap rates for Midwest or plains grain/row crop ground have been 2-4% because of the low interest rates resulting in the high values. We are seeing those drop since the grain prices have come back down.

How you figure your ROE depends on how you want to define it. If you are looking for farming ROE, figure your land cost at rent. In times of high prices and yields, a bigger number will go to the farmer than the land.

As has been pointed out, ROE can be affected by debt, especially if the interest rates are lower than the farming returns,which is probably not occurring this year and last with the lower prices.

In other words, 15-30% farming returns are not out of line the last few years if you had average to above average yields.
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