Figure 2 shows the trends in liquidity for Illinois Farm Business Farm Management farms since 2006. The two bars represent the 25% and 50% percentiles of producers. The 25% percentile level indicates that 25% of the farms have a value lower than the specified value while the 50% percentile represents the value where one-half of farms have values above and one-half of farms have values below the specified level. The general trend is an increase in farm liquidity from 2006 to 2010 indicating that some of the recent farm profitability has been used to enhance liquidity reserves. The 50% levels also indicate very strong levels of liquidity for farms. In general, a 30% working capital to revenue is considered strong while levels in the 10% to 30% range are viewed as adequate by most lenders.
Liquidity positions vary across different types of farms. The levels of liquidity for farms by age, farm type and tenure position are shown in Table 1. Liquidity tends to increase by age and by farms that tend to own a higher percentage of the acres they farm. Dairy farms hold the lowest level of liquidity. The higher frequency of cash inflows typically allow dairy farms to operate at lower levels of liquidity.
In summary, Illinois farms have generally improved their liquidity levels over the past five years. Improved liquidity is simply another risk management strategy farms can use to mitigate potential downturns in the agricultural economy and provide financial flexibility for future cash flow volatility.