Analysis of Capita 00 Gia C

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AN ANALYSIS OF THE CAPITAL STRUCTURE OF SINGLE PROPRIETOR
KANSAS COMMERCIAL FARMS
bv
ALONNA M. CASHBAUGH GIACOMINI
B. S., California Polytechnic State University

San Luis Obispo, 1976
A MASTER'S 'THESIS
submitted in partial fulfillment of the
requirements for the degree
MASTER OF SCIENCE
Department of Agricultural Economics
KANSAS STATE UNIVERSITY

Man hat tan , Kan s a s
1979
Approved by:
Major Professor
.7H
7f
C , "X
TABLE OF CONTENTS
LIST OF ILLUSTRATIONS ii
LIST OF TABLES iii
ACKNOWLEDGMENTS vi
CHAPTER
I. INTRODUCTION 1
II. REVIEW OF LITERATURE 4
III. METHODOLOGY 15
IV. ANALYSIS OF THE FARM BUSINESS BY NET FARM INCOME 26
V. ANALYSIS OF THE FARM BUSINESS BY GROSS FARM INCOME 34
VI. ANALYSIS OF THE FARM BUSINESS BY FARM TYPE 44
VII. ANALYSIS OF THE FARM BUSINESS BY TOTAL CAPITAL MANAGED ... 57
VIII. THE APPLICATION OF A PROBLEM USING SPSS

BIVARIATE CORRELATION ANALYSIS 70
IX. A PROJECTION OF ADEQUACY OF INCOME 78
X. SUMMARY AND IMPLICATIONS 81
APPENDIX 84
BIBLIOGRAPHY 101
ii
LIST OF ILLUSTRATIONS
1. Kansas Farm Management Associations 17

Ill
LIST OF TABLES
1. Outstanding Farm Real Estate Debt, January 1

(Amounts in Millions of Dollars)
Outstanding Farm Non-Real-Estate Debt, January 1
Percentage of Total (including CCC Loans)
(in millions of dollars) 6
2. Number of Farms Relative to Net Farm Income, Gross Farm

Income, Farm Type, and Total Capital Managed for
Years 1973-1977 20
3. Selected Factors by Net Farm Income for the High 25%

Income Farms from 1973-1977 27
4. Flow of Funds by Net Farm Income for the High 25%

Farms for 1977 29
5. Selected Factors by Net Farm Income for the Low 25%

6. Flow of Funds by Net Farm Income for the Low 25% Farms
for 1977 32
7. Selected Factors by Gross Farm Income for the $0-25,000

8. Flow of Funds by Gross Farm Income for the $0-25,000

Farms for 1977 37
9. Selected Factors by Gross Farm Income for the $50,001-

100,000 Income Farms from 1973-1977 38
10. Flow of Funds by Gross Farm Income for the $50,001-

100,000 Farms for 1977 39
11. Selected Factors by Gross Farm Income for the $150,000 +

12. Flow of Funds by Gross Farm Income for the $150,000 +

Farms for 1977 42
13. Selected Factors by Farm Type for Dairy Farms from

1973-1977 45
14. Flow of Funds by Farm Type for Dairy Farms for 1977 47
15. Selected Factors by Farm Type for Cash Crop-Dryland

Farms from 1973-1977 48
iv
16. Flow of Funds by Farm Type for Cash Crop-Dryland

Farms for 1977 50
17. Selected Factors by Farm Type for Cash Crop-Cowherd

Farms from 1975-1977 51
18. Flow of Funds by Farm Type for Cash Crop-Cowherd Farms

for 1977 52
19. Selected Factors by Farm Type for Sow and Litter (Market)
Farms from 1973-1976 53
20. Flow of Funds by Farm Type for Sow & Litter (Market)
Farms for 1976 55
21. Selected Factors by Total Capital Managed for $0-250,000

Farms from 1973-1977 58
22. Flow of Funds by Total Capital Managed for $0-250,000

Farms for 1977 60
23. Selected Factors by Total Capital Managed for $450,001-

550,000 Farms from 1973-1977 61
24. Flow of Funds by Total Capital Managed for $450,001-

550,000 Farms for 1977 62

900,000 Farms from 1973-1977 64

900,000 Farms for 1977 65
27. Selected Factors by Total Capital Managed for $900,001+

Farms from 1974-1977 66
28. Flow of Funds by Total Capital Managed for $900,000 +

Farms for 1977 68
29. Pearson Correlation Coefficients 75
30. Adequacy of Income for 1977 Sample Farms

Projected Adequacy of Income for Sample Farms in 1982
Applying 9% Inflation to Expenses and Family Living and
Holding Gross Farm Income Constant 79
31. Selected Factors by Net Farm Income for the High Middle
25% Income Farms from 1973-1977 85
32. Flow of Funds by Net Farm Income for the High Middle 25%
Farms for 1977 86
33. Selected Factors by Net Farm Income for the Low Middle 25%
34. Flow of Funds by Net Farm Income for the Low Middle 25%
Farms for 1977 88


50,000 Farms for 1977 90


150,000 Farms for 1977 92

350,000 Farms from 1973-1977 93

350,000 Farms for 1977 94

450,000 Farms from 1973-1977 95

450,000 Farms for 1977 96

655,000 from 1973-1977 97
44. Flow of Funds by Total Capital Managed for $550,001-$655,000

Farms for 1977 98

775,000 Farms from 1973-1977 99

775,000 Farms for 1977 100
vi
ACKNOWLEDGMENTS
I wish to express my sincere appreciation to Dr. Don D. Pretzer,
my major professor, for his guidance, and suggestions throughout the
past year. I am also grateful to Dr. Bryan Schurle for his counsel
during my graduate studies.
I would like to thank Dr. Larry N. Langemeier and Dr. Orlan Buller
who served on my graduate committee.
Recognition is given to Gary Hanna and Kristopher L. Arheart for
their programming assistance.
Finally, I wish to thank my husband, Gary, for his patience and
support which has helped me to complete this master's thesis.

CHAPTER I
INTRODUCTION
The Changing Scene in Agriculture
Agriculture is in a continual process of change. This process
of transformation has taken U.S. agriculture from one of primarily self-
subsistence to the present day highly commercialized and capital-inten-
sive agriculture. This transformation to a more technical agriculture
has led to the following:
1. Increased capital and credit needs;
2. Purchased inputs making up a relatively larger proportion of

total inputs;
3. A greater demand for production and marketing efficiency;
4. An increased rate of resource and human obsolescence;
5. A problem of keeping abreast of rapidly changing technology;
6. Increased specialization;
7. Larger farms with fewer operators;
8. Increased total agricultural output;
9. Increased competition from synthetic products;
10. A need for more sophisticated management.
David L. Heisterberg, "An Analysis of Capital Acquisition By

Beginning Farmers," (Unpublished M.S. thesis, University of Missouri,
1975), pp. 1-2.
The Balance Sheet of Farming
U.S. farm assets were valued at $709 billion on January 1, 1978,
and outstanding debt was $120 billion, leaving farm proprietors an equity
of $589 billion. These amounts compare with assets of $655 billion, a
debt of $103 billion, and an equity of $552 billion at the beginning of
1977.
Farm real estate is by far the most valuable farm sector asset,
accounting for close to three-fourths of total asset value the last sev-
eral years. Farm real estate debt outstanding at the beginning of 1978
was $64.2 billion, 13.5 percent higher than a year earlier. The rate of
increase in farm real estate loans in 1977 was one and cne-half times
the rate of increase in the value of land in 1977. Part of the increase
resulted from farmers refinancing farm operating or intermediate-term
loans into farm mortgage loans which stretched out the repayment period
and required smaller annual payments. The financial shifting of short
term debt to long term debt may relieve annual cash flow problems and/or
allow additional debt servicing to enlarge existing profitable enter-
prises or add new enterprises. The issue of financial and management
survival in the short run with long run implications prompted the fol-
lowing objectives for this research:
1. Determine the sources of capital currently used by Kansas

farmers.
2. Determine the returns to capital.
2
U.S. Department of Agriculture, Economics, Statistics, and Coop-
eratives Service, Balance Sheet of the Farming Sector 1978, by Carson
,
D. Evans and Richard W. Simunek, Agriculture Information Bulletin No. 416

(Washington, D.C.: Government Printing Office, June, 1978), pp. 1-7.
3
3. Determine the interrelationship of loan terms.
4. Demonstrate the relationship of cash flow and profitability.
5. Test for adequacy of income for farms now and in five years,
(1982).
Work by the Farm Management Fieldmen, state extension specialists,
and concern by farmers and agricultural lenders indicated the need for
more indepth analysis of the relationship between the variable, interest
paid by farmers for the use of borrowed capital, to farm income and ex-
pense. Therefore, the sixth objective of this research was to investigate
the relationship between interest expense and the following variables:
gross farm income, net farm income, total capital managed, total cash
operating expenses, depreciation, total expenses, net worth, return to
labor and management, land value-owned, land value-rented, current loans,
long-term loans, livestock income, and crop income.

CHAPTER II
REVIEW OF LITERATURE
An extensive computer search was conducted through Farrell Library
at Kansas State University to obtain sources for a review of literature.
The file searched was Agricola. Key words such as debt, equity, risk,
leverage, and others were coded into the computer to aid in the search
process. Several related articles and research reports were retrieved.
Many sources retrieved were associated with the objectives of this thesis,
although research directly relevant was not found. The review of liter-
ature which follows is a summary of information relevant to the method-
ology and analysis of results chapters of this thesis.
"Total U.S. farm debt outstanding on January 1, 1978, including
CCC loans on stored crops, increased a record $17 billion from January 1,
1977, the largest percentage rise since 1948. The increase in farm
indebtedness in 1976 was $12 billion. Farm real estate debt outstanding
at the beginning of 1978 was $64.2 billion, 13.5 percent higher than a
,,1
year earlier.
Several factors may have caused the dramatic debt expansion to
occur, according to Thomas L. Frey in an article entitled "Agricultural
U.S. Department of Agriculture, Economics, Statistics, and Coop-

eratives Service, Balance Sheet of the Farming Sector 1978, by Carson D.
,
Evans and Richard W. Simunek, Agriculture Information Bulletin No. 416

(Washington, D.C.: Government Printing Office, June, 1978), p. 3.
2
Credit for the 1970s." 1) With cost-price squeezes continually pres-
ent, farms have been forced to expand to take advantage of the efficiency
and the lower cost of production. 2) The substitution of capital for
labor has occurred because changing relative prices of resources and
production inputs favor substitution. 3) Farm firms will continue to
purchase more inputs and the cost of all these inputs rises steadily.
4) Farmers realize that success today is increasingly dependent on the
ability to profitably use borrowed capital. With this ever increasing
demand for agricultural credit, the question of who is and who will be
supplying credit to agriculture is extremely important.
In 1977, individuals were the most important source of real estate
credit (See Table 1). They supplied 35.8 percent of all farm real estate
loans, however this is somewhat less than 45.9 percent they supplied in
1940. Other major farm real estate lenders include Federal Land Banks,
Insurance Companies, Commercial Banks, and the Farmers Home Administra-
tion.
The Federal Land Banks have been increasing the number of new
loans as well as total loan volume over time and are expecting to continue
doing so in the future. Also, since the 1950s* the Farmers Home Admin-
istration (FmHA) increased its relative importance while life insurance
companies were decreasing in relative importance and commercial banks
were decreasing slightly.
Currently, commercial banks are the largest farm non-real estate
lenders (See Table 1). In 1977, they accounted for 51 percent of the
2
Thomas L. Frey, "Agricultural Credit For The 1970s," paper
presented at the Farm Credit Management Training Seminar, Nebraska
Center, 13 May 1971.
TABLE 1
OUTSTANDING FARM REAL ESTATE DEBT, JANUARY 1
(Amounts in Millions of Dollars)
Commercial Insur. Individuals

Year Banks FLB Comnany FHA and Others
1940 $ 534 $ 2010 $ 984 $ 32 $ 3026
1945 450 1210 938 196 2147
1950 932 906 1172 2TJ2 2367
1955 1161 1267 2052 378 3387
1960 1523 2335 2820 676 4728
1965 2417 3687 4238 1285 7218
1970 3345 6671 5734 2280 10953
1975 5966 13402 6297 3215 17408
1976 6296 15950 6726 3369 18728
1977 6781 18455 7400 3688 20266
Percentage of Total I
1940 8.1 30.5 14.9 0.5 45.9

1945 9.1 24.5 19.0 4.0 43.4
1950 16.7 16.2 21.0 3.6 42.5
1955 14.1 15.4 24.9 4.6 41.1
1960 12.6 19.3 23.3 5.6 39.1
1965 12.8 19.5 22.7 6.8 38.2
1970 12.1 22.9 19.6 7.8 37.5
1975 12.9 29.0 13.6 6.9 37.6
1976 12.3 31.2 13.2 6.6 36.7
1977 12.0 32.6 13.1 6.5 35.8
OUTSTANDING FARM NON-REAL-ESTATE DEBT, JANUARY 1

PERCENTAGE OF TOTAL (INCLUDING CCC LOANS)
(in millions of dollars)
CCC Commercial Individuals

Year Loans 3anks ?CA FICB FHA and Others
1940 $ 445 $ 900 3 153 $ 32 $ 418 $1500
1945 683 949 138 30 453 1110
1950 1721 2049 387 51 347 2320
1955 2219 2934 577 58 417 3210
1960 1165 4819 1361 90 398 4860
1965 1543 6990 2273 125 644 6330
1970 2679 10330 4495 218 785 5340
1975 319 18238 9519 374 1044 6050
1976 358 20160 10773 350 1772 6350
1977 1012 23233 12223 368 1877 7300
of Total
1940 12.9 4.4
26.1 0.9 12.1 43.5
1945 20.1 27.9
5.5 0.9 13.3 32.3
1950 25.0 5.6
29.8 0.7 5.0 33.7
1955 23.6 31.2
6.1 0.6 4.4 34.1
1960 9.2 10.7
38.0 0.7 3.1 38.3
1965 8.6 39.0
12.7 0.7 3.6 35.3
1970 11.2 43.3
18.9 0.9 3.3 22.4
1975 0.9 26.8
51.3 1.1 2.9 17.0
1976 0.9 27.1
50.7 0.9 4.5 16.0
1977 2.2 50.5
26.6 0.8 4.1 15.8
Source: Agricultural Finance Databook, Board of Governors of the Federal
Reserve System, November, 1977.
7
market, up from 26 percent in 1940. Other major non-real estate lenders
include Production Credit Associations, individuals, and the Farmers
Home Administration.
Non-real estate debt is normally used to finance livestock,
machinery, household needs, motor vehicles, and operating needs. Produc-
tion Credit Associations increased their relative share from slightly
more than 4 percent to 27 percent during the 1940-1977 period. Individ-
uals, by far the most important non-real estate credit lenders in 1945,
dropped to number three in 1977, holding 16 percent of the credit the
latter year. The Farmers Home Administration reduced its relative share
from 12 percent to 4 percent even though its absolute volume more than
quadrupled. The Commodity Credit Corporation (CCC) went from a major
credit supplier in the 1950s to become almost nonexistent by 1976. Based
upon these observations, substantial shifts in the major suppliers of

3
farm non-real estate credit have occurred since the 1940s and 1950s.
Commercial Banks
According to the text Commercial 3anking , by Reed / Cotter /
4
Gill / Smith, commercial banks are an important source of short term,
intermediate term, and long terra credit. Studies conducted by the Fed-
eral Reserve System periodically indicate that of loans financed by
3
David L. Heisterberg and James B. Kliebenstein, Farm Lending
Practices and Services Provided for Missouri Farmers by Selected Credit
Sources (Columbia: University of Missouri Agricultural Experiment
Station, [1976]), pp. 4-10.
4
Edward W. Reed et al. Commercial Banking (Englewood Cliffs:
,
Prentice-Hall, Inc., 1976), pp. 305-307.

8
commercial banks, about 50 percent are for meeting current expenses, 40
percent for intermediate term investment, and the remaining 10 percent
for such purposes as financing real estate, the consolidation of debts,
etc.
Farm loans for current expenses include loans made by commercial
banks to farmers for financing the recurring seasonal expenses for crop
and livestock production, for family living outlays, and to purchase
feeder livestock. Most of the current-expense loans to farmers made by
commercial banks are secured and relatively small. Current operating
loans generally are payable when the cash flow they generate is received,
which customarily is in less than one year.
Farm loans for intermediate-term purposes include loans to pur-
chase assets that will last several years, usually three to seven years.
Such loans make possible the purchase of breeding livestock, machinery
and equipment, automobiles and other consumer durable goods, building
improvements and conservation practices. A smaller percentage of inter-
mediate-cerm loans is unsecured than is true of current-expense lending
to farmers, because of the increased length of the maturity, which
increases the risk. A large percentage of the intermediate-term farm
loans is repayable on an installment basis.
Loans to buy farm real estate are made for the purchase of land
and buildings. The relative insignificance of bank loans to purchase
real estate stems from the risk involved and the maturity of such loans.
The maturity of most loans is relatively long since the purchase of a
farm usually requires the working lifetime of a farmer. Commercial banks,
because of their liquidity needs, are not in a position to make loans

9
for a 40 year period as are the Federal Land Banks, which specialize in
loans to farmers for the purchase of real estate. Individuals, life
insurance companies, and the Federal Land Bank are much larger farm real
estate lenders than are commercial banks.
Insurance Companies
Life insurance companies are an important source of long-term
mortgage credit for farmers. Life insurance companies generally make
only first-mortgage loans on farm and ranch property. In some states
they are prohibited by law from making short-term loans. There are no
limits on the size of insurance company loans except for a self-imposed
minimum and a maximum based upon the appraised value of the security.
The minimum is generally set in the range of $5,000 to $10,000, depending
upon individual company policy, with a view to avoiding the relatively
high expense and possible risk associated with such loans. Insurance
companies are permitted by law to make mortgage loans up to 75 percent
of the appraised value.
Loans generally range in terms from 5 to 25 years, with most of
them being written currently for a 20 year term. Where the security is
adequate, the term may be extended to 25 years or more, depending on
company policy.
I ndividuals
Merchants, dealers, processors, individuals, and other types of
noninstitutional lenders are an important source of credit for farmers.
Aaron G. Nelson, Warren F. Lee, and William G. Murray, Agricul -
tural Finance 6th ed. (Ames:

, The Iowa State University Press, 1973),
pp. 339-341.
10
In considering financing by noninstitutional lenders, it should be recog-
nized that there probably is greater variability in their policies and
procedures than in those of institutional lenders.
Federal Land Sanks
Federal Land Banks deal primarily in real estate loans with some
rural home loans being made. All loans are for five years or longer,
with the usual farmland purchase being made for 20-35 years forty years
being the maximum loan period.
FLB's are allowed by the 1971 Farm Credit Act to lend up to 85
percent of an assets value. No upper limit is established for the total
amount borrowed provided the borrower meets the qualifications for get-
ting the loan.
The FLB can make participating loans with the Farmers Home Admin-
istration. It is possible, through a participating loan, for the farmer
to borrow 100 percent of an asset's appraised value. With this arrange-
ment, the agencies participating in the loan share the risk involved in
supplying a farmer with capital needed.
Production Credit Associations
Under present regulations, Production Credit Associations are
allowed to make loans with terms up to seven years, but, the majority
have a shorter term than this. They primarily make operating and/or
6
Ibid., pp. 350-352.
Heisterberg and Kliebenstein, Farm Lending Practices and

Services Provided for Missouri Farmers by Selected Credit Sources ,
pp. 16-17.
11
short and intermediate term loans. PCA's can lend up to 100 percent of
the farmer's needs for operating capital and will usually do so if the
farmer can meet the basic credit factors: the individual; financial
position or progress; repayment capacity; basis of approval; and col-
lateral.
PCA's can provide a line-of-credit financing plan. Under this
system, seasonal and annual credit needs are determined in advance with
the borrower drawing the money when needed and with interest paid only
for the time the money is used.
PCA's are also allowed to make participating loans with commer-
cial banks. This can be beneficial to those farmers whose credit needs
o
exceed the lending limits of commercial banks which provide financing.
Farmers Home Administration
The Farmers Home Administration has several types of loans to
offer with farm ownership and/or farm operating loans the primary agri-
cultural ones. Farm ownership loans can be used to buy land; to con-
struct, repair or improve buildings; to improve farmland; to develop
water facilities; and to refinance any of the above type debts. Farm
operating loans can be used for purchasing livestock, equipment, feed,
seed, supplies for farm and home operations, and for refinancing or
paying interest on operating debts. FmHA is allowed to lend 100 percent
of the appraised agricultural value of real estate and 100 percent of
operating capital needs.
Real estate loans through FmHA are limited to 200,000 and with
a maximum payback period of 40 years. In order to accommodate loan
Ibid., pp. 17-18,

12
demands larger than this, FmHA is authorized to enter into a partici-
pating loan with other institutions. Operating loans are limited to a
seven year repayment period and $100,000 with the ability to renew the
Q
loan for an additional five years if necessary.'
Profitability and Liquidity
Dr. Lester L. Arnold, Vice President of the Federal Intermediate
Credit Bank, Louisville, Kentucky, presented some ideas on profitability
and liquidity at the Area Extension Farm Management Workshop, Hueston
Woods Lodge College Corner, Ohio, May 28, 1975.
Profit is the primary objective of the farmer in managing his

business and is achieved through efficiency, combined with adequate
volume. However, a given dollar profit level has limited meaning
unless associated with some volume of business. A profit of $30,000
may represent high achievement on a modest sized operation but would
represent extreme inefficiencies on a large farming business. Profit
is the return to the operator and family members for their labor
and management input and for capital invested in the business. The
extent to which profit is adequate can be measured in two ways:
1. Is it sufficient in relation to capital investment and value of
farm production to provide an adequate return for labor, manage-
ment, capital and equity?
2. Does it represent a level that will provide adequately for
family living, new investment requirements, and debt repayment?
Comparative financial statements indicate the financial position
at two distinct points in time usually at 12 month intervals. An earn-
ings statement analyzes the farm business as to its level of profit or
loss between these two points in time. Growth may be indicated on the
9
Ibid., pp. 18-20.
Dr. Lester L. Arnold, "Capital Planning In This Period Of

Increasing Risk And Uncertainty," paper presented at the Area Extension
Farm Management Workshop, Hueston Woods Lodge College Corner, Ohio,
28 May 19 75.
13
comparative financial statement, but the earnings statement for the
period must be studied in order to determine if earnings support the
indicated change in equity. If not, financial growth must be the result
of appreciation.
In financial planning, neither cash flow nor profit analysis is
sufficient by itself. The projected earnings statement estimates prof-
itability, but alone, does not indicate liquidity or provide the necessary
information to determine loan repayment capacity. The cash flow projec-
tion shows liquidity and loan repayability, but does not, by itself,
indicate profitability. A planned capital investment must meet both
the liquidity and profitability tests.
Leverage
Hopkin discusses financial leverage in Financial Management in
Agriculture as the use of borrowed funds to supplement equity capital.
In terms of a firm's balance sheet, the level of financial leverage can
be expressed as the ratio of debt to equity: L=D/E. Thus, higher
leverage refers to an increase in the debt-to-equity or leverage ratio.

12
According to Nelson, Lee, and Murray in Agricultural Finance ,
the financial manager really has only two basic sources of capital,
namely, his own equity capital and someone else's capital. The term
nonequity capital is used to refer to borrowing, leasing, and other
arrangements or contracts.
John A. Hopkin, Peter J. Barry, and C.B. Baker, Financial

Management in Agriculture (Danville: The Interstate Printers & Publish-
ers, Inc., 1973), p. 150.
12
"Nelson, Lee, and Murray, Agricultural Finance , 6th ed., p. 57.
14
The use of nonequity capital, whether it be acquired by borrow-
ing, leasing, or some other contractual agreement, creates a fixed finan-
cial commitment in the form of principal, interest, rent, or a share
lease. This financial commitment to the supplier of nonequity capital
results in financial risk. As leverage increases, the financial commit-
ment increases, hence, the risk increases. At the same time, as long as
the rate of return on capital invested exceeds the cost of using non-
equity capital, there is a gain from the use of leverage in the form of
increased returns to the owner of the business.

CHAPTER III
METHODOLOGY
The Kansas Extension Farm Management Association Program is part
of the educational program of the County Extension Councils and the
Extension Service of Kansas State University. There are six Farm Manage-
ment Associations covering the entire state, with more than 4,100 farm
families as members. Each Farm Management Association is a group of
farm families who want to put their farms on a better paying basis by
becoming better managers.
The Extension Service and the association together employ field-
men who work personally with the cooperating families. The fieldmen are
Farm Management specialists of the university, stationed out in the state
so they can give close attention to the management and marketing problems
of the cooperating families. Information pertinent to the member's farm
operation is stored in the Kansas State University computer at Manhattan,
Kansas, in the K-MAR-105 (Kansas -Management, Analysis, Research) Whole-
Farm and Enterprise Data Bank, for years 1973-1977.
The K-MAR-105 data bank and computer system was developed for
two primary purposes. First, the system provides detailed whole- farm
and enterprise information to the individual Farm Management Association
Cooperative Extension Service, "The Kansas Extension Farm

Management Association Program," Extension Agricultural Economics,
Manhattan, 1977.
15
16
member. Additionally, the system includes programs which provide special
study information and reports to the individual associations and field-
men. Second, the data bank and retrieval system provide a means whereby
extension, teaching, and research personnel can easily access the data
bank to obtain information for research projects.
"Development of the K-MAR-105 Whole-Farm and Enterprise Data
Bank and Retrieval System was initiated in 1972, with new programs and
refinements added annually. The whole-farm information system contains
427 variables per farm for approximately 2600 farms for the years 1973,
1974, 1975, 1976, and 1977.""
To conduct the proposed research, a list of farms with records
on the Farm Management data bank was compiled from Farm Management Asso-
ciation #1 and #4, North Central and Northeast Kansas, respectively.
(See Figure 1.) To simplify the data, all partnerships and corporations
were excluded. Accounting and tax records of partnerships and corpora-
tions may disguise the existing farm operation, making it difficult to
analyze the results of the research. Only sole proprietor operators
who had records on the Farm Management data bank for each of the years
1973-1977 were compiled for the sample. This period of years is consi-
dered to be representative of those expected in the future.
Farms were selected from North Central and Northeast Kansas
because these areas contain several types of agriculture. The final
sample contained 320 sole proprietor operated farms from North Central
and Northeast Kansas. Computer cards were punched for each farm for each
"Larry N. Langemeier, "The K-MAR-105 Whole-Farm and Enterprise

Data Bank and Retrieval System," Extension Agricultural Economics Farm
Management Studies, Manhattan, 19 77.
17 o
18
year 19 73-1977, in the format of association number, county number,
farm number, year of data, ownership type, and farm type.
In the first phase of this research, the sample of farms was
read in the K-MAR-105 Summary and Analysis Program by individual years,
1973, 1974, 1975, 1976, and 1977. The Summary and Analysis Program is
designed to generate output for the "Farm Management Summary and Analysis'
reports, as well as for information for special studies, farm management
guides, and newsletters. "Summary and Analysis Reports provide averages
and trends regarding the business and operational aspects of northeast

3
Kansas commercial farms."
The Summary and Analysis computer program was used to generate
and retrieve data relative to Net Farm Income, Gross Farm Income, Farm
Type, and Total Capital Managed for the 320 sample farms. Table 2 lists
a breakdown of the number of farms for each specific division of Net
Farm Income, Gross Farm Income, Farm Type, and Total Capital Managed
for each year 1973-1977. Specific divisions for each classification are
as follows:
1. Net Farm Income

a. High 25 percent
b. High Middle 25 percent
c. Low Middle 25 percent
d. Low 25 percent
2. Gross Farm Income

a. $0-25,000
b. $25,001-50,000
c. $50,001-100,000
d. $100,001-150,000
e. $150,001
3
Cooperative Extension Service, Farm Management Summary and
Analysis Report Kansas 1977 State Report (Manhattan:
, Kansas State
University, [19 77]), o. 10.
19
3. Farm Type
a. Dairy
b. Cash Crop-Dryland
c. Cash Crop-Cowherd
d. Sow and Litter (Market)
4. Total Capital Managed

a. $0-250,000
b. $250,001-350,000
c. $350,001-450,000
d. $450,001-550,000
e. $550,001-655,000
f. $655,001-775,000
g. $775,001-900,000
h. $900,001
The classifications of Net Farm Income, Gross Farm Income, and
Total Capital Managed were selected to investigate the size of the sample
farms. Specific divisions within each classification were chosen to
indicate changes as the size of the farms changed. The Farm Type classi-
fication was selected to determine the capital structure by type of farm
for the sample.
The Summary and Analysis program computer output provides income,
expense, financial, size, livestock production, and crop production
information in a standardized format. The computer outputs contain data
essential to categorizing Net Farm Income, Gross Farm Income, Farm Type,
and Total Capital Managed into formats to meet the objectives of this
thesis.
Specific data retrieved for each of the divisions were: debt,
equity, and lease capital, total capital managed, percent return to
equity, percent return to capital, dollar return to labor and management,
expense/$100 gross income, and amounts of debt according to term and
financial ratios.
20
TABLE 2
NUMBER OF FARMS RELATIVE TO NET FARM INCOME,
GROSS FARM INCOME, FARM TYPE, AND TOTAL CAPITAL MANAGED
FOR YEARS 1973-1977
1973 1974 1975 1976 1977
Net Farm Income
High 25% 80 80 79 78 80
High Middle 80 80 79 78 80
Low Middle 80 80 79 78 80
Low 25% 79 79 80 78 80
Gross Farm Income
0-25,000 ^M 42 19 15 11
25,001-50,000 40 96 72 90 73
50,001-100,000 163 127 145 136 135
100,001-150,000 77 39 51 46 60
150,000 + 37 15 30 25 41
Farm Type
Dairy 40 40 39 34 35
Cash Crop-Dryland 21 190 182 120 129
Cash Crop-Cowherd 11 23 20
Sow & Litter (Mkt) 5 21 18 5
Total Capital Managed
0-250,000 99 85 39 29 27
250,001-350,000 89 82 57 51 50
350,001-450,000 54 56 65 53 48
450,001-550,000 25 35 40 52 54
550,001-655,000 30 29 42 44 46
655,001-775,000 15 18 35 28 32
775,001-900,000 6 9 15 20 17
900,000+ 5 24 35 46
21
Net income was retrieved to examine the flow of funds concept of
servicing family living, income tax and social security, debt, and growth
for each of the years 19 73 through 1977. Future needs were projected
using 19 77 as the base year for various classifications from the total
sample.
The sixth objective, interest expense, was analyzed using the
computer program SPSS (Statistical Package for the Social Sciences),
specif ically to use bivariate correlation analysis to summarize the
strength of association between a pair of variables using an SPSS sub-
program, PEARSON CORR. In bivariate correlation analysis, a single num-
ber summarizes the relationship between two variables. There are no
independent or dependent variables in this correlation. The analysis
simply investigates a relationship between two variables.
Subprogram PEARSON CORR computes Pearson product-moment corre-
lations for pairs of variables. This program was used to investigate
the relationship between the variable interest expense, V18, and the fol-
lowing fourteen variables:
V4 Gross Farm Income
V5 Net Farm Income
V6 Total Capital Managed
V7 Total Cash Operating Expenses
V8 Depreciation
V9 Total Expenses
VIO Net Worth
Vll Return to Labor and Management
V12 Land Value - Owned

22
V13 Land Value - Rented
V14 Current Loans
V15 Long Term Loans
V16 Livestock Income
VI 7 Crop Income
Gross Farm Income, Net Farm Income, Total Capital Managed, Land
Value-Owned and Rented, and Current and Long Term Loans are stored in
the data bank in this format. The remaining variables were derived as
explained below.
Gross Farm Income includes income to the businesses based on
sales minus cost of items for resale, such as feeder livestock, plus or
minus changes in inventory. Accrual basis income reflects the value
of production whether sold or not.
Net Farm Income is equal to gross farm income minus total cash
operating expenses and depreciation. Net Farm Income is a measure of
the return to the operator's labor, management, and net worth computed
on an accrual basis.
Total Capital Managed is the total assets of the business (cur-
rent, intermediate, and long-term) plus the value of rented land. It
represents the total value of capital used in the farm operation.
Total Cash Operating Expenses consists of hired labor, machinery-
repairs, building repairs, interest paid, feed purchased, seed and crop
insurance, fertilizer and lime, machine hire, organization fees, etc.,
vet-medicine-drugs, irrigation expense, livestock marketing and breeding,
gas-fuel-oil, real estate taxes, personal property taxes, general farm
insurance, telephone and electricity, cash farm rent, herbicide and
insecticide, conservation, auto expense and inventory change.

23
Depreciation refers to the arbitrary proration of the cost of a
capital asset to the business over the expected life of the asset- It
consists of the total depreciation from motor vehicles, machinery and
buildings.
Total Expenses consists of the total cash operating expenses plus
depreciation.
Net Worth is defined as the value of assets of a business that
would remain if the business were to be liquidated and all outside claims
against the business were paid. The opportunity cost of the Net Worth
can be calculated as (interest charge on net current and intermediate
assets plus interest charge on net long-term assets) divided by .06.
Return to Labor and Management equals net farm income less a
charge for the following three items: (a) 6 percent of the net worth in
land, buildings and long-term accounts receivable, (b) 6 percent of the
net worth in machinery, livestock, feeds, and current-intermediate
accounts receivable, and (c) the estimated value of unpaid farm labor of
family members other than the farm operator. It provides a measure of
the operator's own earnings for his labor and management after giving
credit for his net worth.
Land Value - Owned is the total dollar value of all owned land.
(Land was revalued in 1975 based on an appraisal for conservative agri-
cultural purposes.)
Land Value - Rented is the total dollar value of all rented land.
(Land was revalued in 1975 based on an appraisal for conservative agri-
cultural purposes.)
Current Loans reflect the total value of all current loans.

.
24
Long Term Loans reflect the total value of all long term loans.
Livestock Accrual Income consists of these income items beef,

dairy, sheep, swine, poultry, other livestock, milk products sales, and
egg sales.
Crop Accrual Income consists of these income items grain, hay
and forage, and cash crops.
The "Farm Management Summary and Analysis Report'' outlines some
additional terms that provide a framework for the discussions in the

L
analysis of results chapters.
Return to Capital equals net farm income plus interest paid less
a $7500 labor charge for each operator less the estimated value of unpaid
family labor less a management charge (10 percent of Gross Farm Income)
It provides a measure of the operator's return to capital after giving
credit for his labor and management.
Percent Return on Capital Managed equals return to capital divided
by total capital managed. It represents the rate of return on the total
capital, including the value of rented land, used in the farm operation.
Percent Return on Net Worth equals return to capital minus
interest paid divided by the operator's net worth in the farm operation.
It represents the rate of return on the operator's net worth.
Current Assets equal the total sum value of livestock, supplies,
crops, feeds, and current accounts receivable.
Intermediate Assets equal the total sum value of machinery, motor
vehicles, and intermediate accounts receivable.
4
Ibid., pp. 10-11.
25
Long Term Assets equal the total sum value of owned land, build-
ings, and long term accounts receivable.
Current and Intermediate Loans equal the total sum value of loans
for livestock, supplies, crops, feeds, machinery, motor vehicles, etc.
Long Term Loans equal the total sum value of loans for owned
land, buildings, etc.
C and I Loans/C and I Assets is the ratio of current and inter-
mediate loans to current and intermediate assets.
Long Term Loans /Long Term Assets is the ratio of long term loans
to long term assets.
It should be noted that the method of calculation of return to
capital is a residual method. Capital is credited with the residual
income after $7500 is subtracted for operator labor and 10 percent of
gross farm income is subtracted for a management charge. The $7500
constant for labor may build a bias in the results. An alternative
method of calculation of return to capital could be to regress total
capital on gross income.

CHAPTER IV
ANALYSIS OF THE FARM BUSINESS BY NET FARM INCOME
An analysis by net farm income for the high 25 percent income
farms from 1973-1977, (see Table 3), showed inconsequential change in the
percent of debt, equity, and lease capital of total capital managed over
the five year period. Equity capital represents slightly less than one
half of the total capital managed. Lease capital represents just over a
third of the total capital managed and debt capital represents the bal-
ance of total capital managed or about 17 percent.
The 1973 percent return to equity, percent return to total cap-
ital, and dollar return to labor and management figures are. substantially
greater than the same figures for 19 74-1977. Farm prices were unusually
high in 1973 offering a probable explanation for the 19 73 figures. Aver-
age figures for the period 1973-19 77, for percent return to equity, per-
cent return to total capital, and dollar return to labor and management
are just less than one half of those shown for 1973.
There was a substantial decrease in absolute dollars of current
and intermediate loans (C & I loans) and long term loans from 1973 to
1974. Likewise, the ratio of C & I loans to C & I assets and the ratio
of long term loans to long term assets improved from 19 73 to 1974. The
farmers realized high net farm incomes in 1973 and probably made larger
payments on outstanding loans that year. Generally, the absolute dollars
26
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28
of C & I loans and long term loans increased from 19 75 to 1977. The
ratio of C & I loans to C & 1 assets increased from 1975-1977, but the
ratio of long term loans to long term assets did not rise until 1977.
This may be attributed to the fact that land was revalued by the Farm
Management Association in 19 75, causing dollars of long term assets
to increase.
The flow of funds analysis for the high 25 percent income group
for 1977, (see Table 4), demonstrated that a net farm income of $40,390
had an end residual of $8,631 available for long run growth and short
term debt retirement. With expenses of $69/$100 gross income in 1977,
and 9 percent assumed inflation in effect, the $8,631 would be eroded
by $8,091 the first year. ($89,900 total farm expenses X .09 = $8,091.)
The residual for growth and debt retirement would then be only $540.
An analysis by net farm income for the low 25 percent income
group from 1973-1977, (see Table 5), showed inconsequential change in the
percent of debt, equity, and lease capital of total capital managed over
the five year period. Debt capital represents about one fourth of the
total capital managed. Equity capital represents slightly over a third
of the total capital managed and lease capital represents the balance of
total capital managed or about 41 percent.
The percent return to equity, percent return to total capital,
and dollar return to labor and management figures are positive for only
1973. Farm prices were exceptionally good in 1973, explaining the posi-
tive figures for that year.
The absolute dollars of C & I loans and long term loans increased
steadily from 1973 to 1977 with some slight fluctuations in 1975 and 1977.
29
TABLE 4
FLOW OF FUNDS
BY NET FARM INCOME FOR THE HIGH 25% FARMS FOR 1977
1. NET FARM INCOME $ 40,390
2 . DEPRECIATION + 12,403
3. AVAILABLE FARM INCOME 52,79 3
* 4. OUTSIDE INCOME (Net) +
5. AVAILABLE (Fam. Liv., Debt, Growth) 52,793
** 6. FAMILY LIVING (Expected) 10,710
** * 7. INCOME TAX AND SS (Expected) 15,053
8. AVAILABLE DEBT SERVICING (Old P. & New P. & i) 27,030
9. PRINCIPAL PAYMENT INTERMEDIATE AND LONG TERM 5,996
10. AVAILABLE FOR SHORT TERM DEBT SERVICING 21,034
11. LESS DEPRECIATION (Line 2 above) 12,403
12. AVAILABLE LONG RUN GROWTH AND SHORT TERM DEBT RETIREMENT 8,631
* It is recognized there is outside income on most farms. However this

analysis is intended to test for an adequate flow of funds for com-
mercial Kansas farms from farm sources.
** Average for a family of four for all associations.

1 44
*** ( (Line 1 less (750 X 4) ) X .0213)
44
Income taxes & SS (Taxable Income X .0213)
Taxable Income = Line 1 -(4 dependents X $750)
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31
Likewise, the ratio of C & I loans to C & I assets rose steadily over the
five year period. The ratio of long term loans to long term assets
increased slightly over the five year period. Possibly, the revaluing
of land in 19 75 by the Farm Management Association, which subsequently
increased dollars of long term assets, prevented the long term ratio from
increasing substantially.
The flow of funds analysis for the low 25 percent income farms
for 1977, (see Table 6), demonstrated that a net farm income of $-9750
had an end residual of an even lower $-27,176 available for long run
growth and short term debt retirement. With total farm expenses of
$75,299 for the low 25 percent income group and 9 percent assumed infla-
tion in effect, there would need to be at least $6777 available for long
run growth and short term debt retirement to absorb the inflation leaving
$0 for growth and debt retirement. ($75,299 total farm expenses X .09 =
$6777.)
The low 25 percent income farms had $115 per $100 gross income
during 1977. Expenses were below $100 only in 1973, the year of record
high farm prices.
Similar tables and flow of funds analyses by net farm income for
the high middle 25 percent and the low middle 25 percent income farms can
be seen in the appendix, (see Tables 31-34)
To summarize the analysis of the farm business by net farm income
for the period 1973-1977, the high 25 percent and the low 25 percent in-
come farms showed the highest percent return to equity, percent return
to total capital, and dollar return to labor and management in 1973.
There was a wide spread between the figures for the two groups with the
32
TABLE 6
FLOW OF FUNDS
BY NET FARM INCOME FOR THE LOW 25% FARMS FOR 1977
1. NET FARM INCOME $ (9,750)
2. DEPRECIATION + 10,352
3. AVAILABLE FARM INCOME 602
5. AVAILABLE (Fam. Liv., Debt, Growth) 602
*** 7. INCOME TAX AND SS (Expected)
8. AVAILABLE DEBT SERVICING (Old P. & New P. & i) (10,108)
10. AVAILABLE FOR SHORT TERM DEBT SERVICING (16,824)
12. AVAILABLE LONG RUN GROWTH AND SHORT TERM DEBT RETIREMENT (27,176)


1 44
*** ((Line 1 less (750 X 4) ) X .0213) - ,,
4 *
Income taxes & SS = (Taxable Income X .0213)
33
high 25 percent farms having a percent return to equity that was over 11
times greater than that of the low 25 percent farms. The high 25 percent
farms had almost 6 times the percent return to total capital than the
low 25 percent farms. The high 25 percent group had 7 times the dollar
return to labor and management than the low 25 percent group. Conversely,
expense per $100 gross income was lowest in 1973. The high 25 percent
income farms consistently had expenses less than $75 per $100 gross in-
come. The low 25 percent income farms had expense less than $75 per
$100 gross income in 1973 only. From 1974-1977, expenses were over $100
per $100 gross income. The high 25 percent income farms had lower average
absolute dollars of C & I loans and long term loans as well as lower
ratios of C & I loans to C & I assets and long term loans to long term
assets than the low 25 percent income farms.
The flow of funds analysis for the high 25 percent income farms
for 19 77 showed adequate dollars available for long run growth and short
term debt retirement. The low 25 percent income farms had inadequate
dollars available for long run growth and short term debt retirement.
CHAPTER V
ANALYSIS OF THE FARM BUSINESS BY GROSS FARM INCOME
An analysis by gross farm income for the $0-25,000 income divi-
sion for 1974-1977, (see Table 7), showed a slight decrease in debt
capital as a percent of the total capital managed. Conversely, lease
capital as a percent of total capital managed showed a slight increase
over the five year period. Equity capital remained fairly constant as
a percent of total capital managed. Equity capital and lease capital
represent about equal percents of total capital managed, with debt capi-
tal representing the balance or 14 percent.
and dollar return to labor and management figures are negative for each
year of the period 1974-1977. Expenses per 3100 of gross income twice
exceeded $100 in 1974 and 1976 and exceeded $100 in 1975 and 1977.
The absolute dollars of C & I loans and dollars of long term
loans fluctuated from 1974-1977, decreasing in 1975 and 1977. Likewise,
the ratios of C St I loans to C & I assets and long term loans to long
term assets fluctuated from 1974-1977, decreasing in 1975 and 1977.
The flow of funds analysis for the $0-25,000 income farms for
1977, (see Table 8), demonstrated that a net farm income of $-3191, after
family living, income tax and social security, and intermediate and long
34
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35
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Vw*
vO ON <
01 i
4J
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ON
fH

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m CM
vO
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p.
vO
CM
ON
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,H
cm
eg
fH CJ
mN
00
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en

P>> fH CM en rH
<U J= 00 ON VO ~3- r-
CO 4J m en O O
en
CM en CM
en | | i i i
r- I I I I 1
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co
C 15
CO
4J
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c O (3 OJ
t8 pj CO
o c CO
<J3 iJ 1-1 <
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o o l-i H oo H

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ed c c "*.
c 1-1 T3 c a
CJ "fi 5 01 IH 3 01 o 4-1 01 4J 01
>. 9) 3 3 03 u e
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B oi C
4J CJ fH 00 4J iH 4J l-< C U) 0)
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36
term debt servicing, had an end residual of $-11,775 available for short
term debt retirement and long run growth. Outside income is not shown
for the sample farms. However, it is recognized that it was substantial
enough over the time frame studied to contribute to the debt reduction.
An analysis by gross farm income for the $50,001-$100,000 income
division for 1973-1977, (see Table 9), showed an inconsequential change
in debt, equity, and lease capital as a percent of the total capital
managed. Average figures showed equity and lease capital as approximately
equal percentages of total capital managed, with debt capital representing
the balance of total capital managed or 17 percent.
Except for 1973, the figures are negative for percent return to
equity. Percent return to total capital figures are negative or between
zero and one from 1974-19 77. The dollar return to labor and management
figures are negative for three of the five years. 19 73 shows a strong
positive return to labor and management but 1975 is below $500. The
expenses per $100 of gross income are fairly constant from 1974-1977.
Expenses/$100 gross income are least in 1973, and expenses are below $100
for all years.
Absolute dollars of C & I loans increased from 1973-1976 with
the 1977 figure declining somewhat. Dollars of long term loans increased
each year from 1973 to 1977. The ratios of C & I loans to C & I assets
and long term loans to long term assets fluctuated from 1973-1977. The
1977 flow of funds analysis for the gross farm income division $50,001-
100,000, (see Table 10), began with a net farm income of $11,719 and
ended with a figure of $-5725, available for long run growth and short
term debt retirement.

37
TABLE 8
FLOW OF FUNDS
BY GROSS FARM INCOME FOR THE $0-25,000 FARMS FOR 1977
1. NET FARM INCOME $ (3,191)

3. AVAILABLE FARM INCOME 447
5. AVAILABLE (Fam. Liv., Debt, Growth) 447
** 6. FAMILY LIVING (Expected) _ 10,710
*** 7. INCOME TAX AND SS (Expected) _
8. AVAILABLE DEBT SERVICING (Old P. & New P. & i) (10,263)

10. AVAILABLE FOR SHORT TERM DEBT SERVICING (11,775)

*** (Line 1 less (750 X 4) ) X .0213)

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39
TABLE 10
FLOW OF FUNDS
BY GROSS FARM INCOME FOR THE $50,001-100,000 FARMS FOR 1977
3. AVAILABLE FARM INCOME 21,121
*** 7. INCOME TAX AND SS (Expected) 1,850
8- AVAILABLE DEBT SERVICING (Old P. & New P . & i) 8,561
12. AVAILABLE LONG RUN GROWTH AND SHORT TERM DEBT RETIREMENT (5,725 )


1 44
*** (Line 1 less (750 X 4) ) X .0213)
( - ..
.
40
An analysis by gross farm income for the $150,000+ income divi-
sion for 1973-1977, (see Table 11), showed an increase in the percent of
debt capital and lease capital of total capital managed over the five
year period. Conversely, equity capital as a percent of the total capi-
tal managed, declined over the five year period. The five year average
figures show equity and lease capital as being approximately equal per-
cents of the total capital managed. Debt capital represents the balance
of the total capital managed or about 27 percent.
The 19 73 figures for percent return to equity are positive for
all years but 1976. Figures for percent return to total capital and
dollar return to labor and management are positive for all years. Figures
decline substantially after 1973 for the percent return to equity, percent
return tu total capital, and dollar return to labor and management. Ex-
penses per $100 gross income were least in 1973, and all years had ex-
penses below $100.
Absolute dollars of C & I loans and long term loans, as well as
the ratios of C & I loans to C & I assets and long term loans to long
term assets increased over the five year period.
The 19 77 flow of funds analysis for the $150,000+ farms, (see
Table 12), began with a net farm income of $33,146 and showed an end
residual of $-1550 available for long run growth and short term debt
retirement.
Similar tables and flow of funds analyses by gross farm income
for the income divisions of $25,001-50,000 and $100,001-150,000 can be
seen in the appendix, (see Tables 35-38)
To summarize the analysis of the farm business by gross farm
income for the period 1973-1977, the $150,000+ income division farms use

41
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42
TABLE 12
FLOW OF FUNDS
BY GROSS FARM INCOME FOR THE $150,000 + FARMS FOR 1977
8. AVAILABLE DEBT SERVICING (Old P. & New P. & 1) 32,218

*** 1 ' 44
(Line 1 less (750 X 4) ) X .0213)
( , ,,
43
more debt capital as a percent of total capital managed than the $0-
25,000 and the $50,001-100,000 income farms. The $50,001-100,000 and
$150,000+ farms had the highest percent return to equity, percent return
to total capital, and dollar return to labor and management in 1973.
The $150,000+ had about one and one-half times the percent return to
equity and percent return to total capital, and almost three times the
dollar return to labor and management than the $50,001-100,000 farms.
Expenses per $100 gross income were least in 1973 for the $50,001
-100,000 and $150,000+ farms. Though expenses were less than $100 from
19 74 to 19 77 for both income divisions, the $150,000+ farms had expenses
below $75 only in 1975. The $0-25,000 farms had expenses well over a
hundred dollars from 1974-1977.
The $150,000+ farms had the largest average absolute dollars of
current and intermediate loans and long term loans. The ratios of C & I
loans to C & I assets and long term loans to long term assets were largest
for the $150,000+ farms.
The flow of funds analysis for the specific divisions of gross
farm income showed there were inadequate dollars available for long run
growth and short term debt retirement in all three cases. However,
higher gross farm incomes results in higher net farm incomes and lesser
negative amounts on the flow of funds analyses.

CHAPTER VI
ANALYSIS OF THE FARM BUSINESS BY FARM TYPE
An analysis by farm type for the dairy farms from 1973-1977,
(see Table 13), showed very little change in the percent of debt, equity,
and lease capital of total capital managed over the five year period.
Debt capital represents about one fourth of the total capital managed,
lease capital represents slightly less than one third, and equity
capital represents the balance of the total capital managed or 45 percent,
The percent return to equity, percent return to total capital and
dollar return to labor and management figures for 1973 are substantially
greater than the same figures for 1974-1977. All figures were negative
in 1974, but the percent recurn to total capital and dollar return to
labor and management figures increased to low positive values in 19 75
and 1976. In 1977, the percent return to equity, percent return to total
capital, and dollar return to labor and management figures exhibited
somewhat stronger support.
Absolute dollars of C & I loans increased over the five year
period. Dollars of long term loans increased over the five year period
except for a decline in 1976. The ratio of C & I loans to C & I assets
and long term loans to long term assets followed a pattern closely resem-
bling the absolute dollars of loans, except for minor deviations.
44
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a w hJ e2^ M H <o- i-3 u U CO- l-l CO- aJ aJ
46
The flow of funds analysis for the dairy farm type for 1977,
(see Table 14), began with a net farm income of $21,795 and resulted in
an end residual of $781 available for long run growth and short term
debt retirement.
With 1977 total farm expenses of $79 per $100 of gross income
and 9 percent assumed inflation in effect, there would need to be an end
residual of $7507 ($83,408 total farm expenses X .09) available for
long run growth and short term debt retirement leaving $0 on the bottom
line.
An analysis by farm type of the cash crop-dryland farms, (see
Table 15) , showed a slight decrease in the percent of equity capital of
total capital managed from 1973 to 1977. Conversely, the percent of lease
capital of total capital managed increased slightly over the same period.
Lease capital represents almost half of the total capital managed, xîth
the balance being accounted for by 15 percent debt capital, and 39 per-
cent equity capital.
Only 1973 exhibited strong positive figures for percent return
to equity, percent return to total capital, and dollar return to labor
and management. Expenses per $100 gross income were least in 1973 and
all expenses were below $100.
Absolute dollars of current and intermediate loans and long term
loans increased from 1973 to 1977. Likewise, the ratios of C & I loans
to C & I assets and long term loans to long term assets followed the same
pattern except for the long term loan ratio in 1975. The decline in this
ratio in 19 75 is probably because land was revalued in 1975 in all Farm
Management Associations.
47
TABLE 14
FLOW OF FUNDS
BY FARM TYPE FOR DAIRY FARMS FOR 1977
3- AVAILABLE FARM INCOME 31,577
* 4. OUTSIDE INCOME (Net) + 0_
5. AVAILABLE (Fam. Liv. , Debt, Growth) 31,577
* * 6. FAMILY LIVING (Expected) 10,710
12. AVAILABLE LONG RUN GROWTH AND SHORT TERM DEBT RETIREMENT 781


1 44 *
*** (Line 1 less (750 X 4) ) X .0213)
(

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1i1 \
(i i 1 i < 1
48
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0) cr aJ -J u <y> i-i </> CJ KH a A-l aJ i-3
49
The flow of funds analysis for 1977 cash crop-dryland farms, (see
Table 16), started with a net farm income of $13,074 and had an end re-
sidual of $-49 71 available for long run growth and short term debt retire-
ment.
An analysis by farm type for the cash crop-cowherd operations for
1975-1977, (see Table 17), showed a slight decrease in the percent of
equity capital of total capital managed. Conversely, the percent of
lease capital of total capital managed increased slightly over the three
year period. Lease capital represents almost one half of the total capi-
tal managed and equity capital represents about 38 percent. Debt capital
represents the balance of total capital managed, or 17 percent.
Of the percent return to equity, percent return to total capital
and dollar return to labor and management figures, only the percent re-
turn to total capital figures were positive. Expenses per $100 gross
income were less than $100 each of the three years, but greater than $75.
Absolute dollars of C & I loans decreased while dollars of long
term loans increased over the three year period. Ratios of C & I loans
to C & I assets and long term loans to long term assets followed the
same pattern.
The flow of funds analysis for the cash crop-cowherd farms for
1977, (see Table 18), began with $11,696 and had an end residual of
$-6,724 avaialble for long run growth and short term debt retirement.
An analysis by farm type of the sow and litter (market) farms for
the period 1973-1976, (see Table 19), showed a sizeable decrease in the
percent of debt capital of total capital managed. Equity capital, as a
percent of total capital managed, increased substantially over the same
period, while the percent of lease capital remained fairly constant.

.
50
TABLE 16
FLOW OF FUNDS
BY FARM TYPE FOR CASH CROP-DRYLAND FARMS FOR 1977
12 AVAILABLE LONG RUN GROWTH AND SHORT TERM DEBT RETIREMENT (4,971)

*** 1 44 *
( (Line 1 less (750 X 4) ) X .0213)
i i
51
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01 O" 01 O aj o CO x u c 3 3 3 B o o
Q W hJ H Z s* Ed < H <n- hJ til o <n- m <o- o M CJ H -1 l-J
52
TABLE 18
FLOW OF FUNDS
BY FARM TYPE FOR CASH CROP-COWHERD FARMS FOR 1977
2 . DEPRECIATION + 5,959
5- AVAILABLE (Fam. Liv., Debt, Growth) 17,655
10. AVAILABLE FOR SHORT TERM DEBT SERVICING (765 )

*** ( (Line 1 less (750 X 4) ) X .0213) 1 44 -
Income taxes & SS = (Taxable Income X .0213) 1 44 -

t
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53
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.
54
The percent return to equity, percent return to total capital
and dollar return to labor and management figures exhibited strong posi-
tive figures in 1973, and to a lesser degree in 1975. Expenses per $100
gross income were least in 1973 and 1975.
Absolute dollars of C & I loans increased from 1973 to 1976 as
did absolute dollars of long term loans, with some decline in both 1974
and 1975. The ratios of C & I loans to C & I assets and long term loans
to long term assets followed the same pattern as the loans until 1976.
The flow of funds analysis for the sow and litter (market) farm
type for 1976, (see Table 20), began with a net farm income of $12,148
and had an end residual of $-7169 available for long run growth and short
To summarize the analysis of the farm business by farm type for
the period 1973-1977, the dairy, cash crop-dryland, and sow and litter
(market) farms had the highest percent return to equity, percent return
to total capital and dollar return to labor and management in 1973.
(Figures were unavailable for cash crop-cowherd farms in 1973 and 1974.)
Expenses per $100 gross income were least in 1973, and less than $100
for all farm types. The dairy and swine farms were low capital users
relative to the cash crop-dryland and cash crop-cowherd farms. Average
figures indicated dairy farms managed $368 of total capital to produce
$100 gross income and sow and litter (market) farms managed $323 to pro-
duce $100 gross income. These figures are substantially less, than the
$672 of total capital managed/$100 gross income for cash crop-dryland
farms, and $874 of total capital managed/$100 gross income for cash crop-
cowherd farms
55
TABLE 20
FLOW OF FUNDS
BY FARM TYPE FOR SOW & LITTER (MARKET) FARMS FOR 1976
5. AVAILA3LE (Fam. Liv., Debt, Growth) 24,890


1 44
*** ( (Line 1 less (750 X 4) ) X .0213) ,.
1
56
The cash crop-cowherd farms had the largest average dollars of
C & I loans and long term loans. The average ratio of C & I loans to
C & I assets was highest for dairy and cash crop-cowherd farms. The
average ratio of long term loans to long terra assets was highest for the
sow and litter (market) farms.
The flow of funds analysis for the four farm types for 1977
and 1976 showed adequate dollars available for long run growth and short
term debt retirement for dairy farms only. The dairy farm type showed
the most overall progress for the period.

CHAPTER VII
ANALYSIS OF THE FARM BUSINESS BY TOTAL CAPITAL MANAGED
An analysis by total capital managed for the $0-250,000 division
for 1973-1977, (see Table 21), showed inconsequential change in the per-
cent of debt capital of total capital managed. Equity, as a percent of
total capital managed increased over the five year period, while the
percent of lease capital of total capital managed decreased. The average
figures showed equity capital represents over half of the total capital
managed, lease capital represents about one fourth of the total capital
managed, and debt capital represents the balance of the total capital
managed, or 19 percent.
The percent return to equity figures showed a positive return
only in 1973. The percent return to total capital showed positive
returns in both 19 73 and 1977, with the 1973 figure being substantially
larger. All years but 1974 showed a positive dollar return to labor and
management with the 19 73 figure being considerably larger than the others,
Expenses per $100 of gross income were least in 1973, and all years had
expenses of less than $100.
Absolute dollars of C & I loans and long term loans fluctuated
over the five year period, 1973-1977. The average figures showed dollars
of C & I loans outstanding as slightly less than dollars of long term
loans outstanding. Ratios of C & I loans to C & I assets and long term
57
i 1*'
-
. i
58
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en
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m
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r^ * vO CO o en CO vO m
en
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m CM
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vO
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co 3 05
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td
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^- 3
U -H 00 <-a i ^<3 I
a a ra c M "3 3 -3 T3
O "C o !h ^3 01 AH 3 0) O _i 1) l u
>v
4J a) l-H
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00
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r-H
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3 CO
u B
AH
1
c
u a
u H CO <0
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ca at OJ O oi co HH 3 UH M u D 00 00
Xi 3 00 - -i OH aO Cu O o u o u ^J M aJ
V o* 01 o aj >: u 3 3 3 3 e
a w AH cSaS H CO- aJ Cd CJ tO- M <o- u M CJ H
59
loans to long terra assets fluctuated in rauch the same pattern as absolute
dollars of C & I loans and long terra loans.
The 1977 flow of funds analysis for the $0-250,000 division, (see
Table 22), started with a net farm income of $10,612 and had an end
residual of $-3,519 available for long run growth and short term debt
retirement.
An analysis by total capital managed of the $450,001-550,000
division, (see Table 23), showed fluctuations in the percent of debt
capital, equity capital, and lease capital of total capital managed
from 19 73-1977. Lease capital represents about one fourth of the total
capital managed and equity capital represents almost 60 percent. Debt
capital represents the balance, or 19 percent.
and dollar return to labor and management figures are largest in 1973.
Expenses per $100 gross income are least in 19 73, and all years showed
expenses of less than $100.
Absolute dollars of C & I loans and dollars of long term loans
fluctuated over the five year period. The ratios of C & I loans to
C & I assets and long term loans to long term assets followed the pat-
terns of the C & I loans and long term loans.
The 1977 flow of funds analysis for the $450,001-550,000 division,
(see Table 24), started with a net farm income of $15,589 and had an end
residual of $-2685 available for long run growth and short term debt
retirement.
An analysis by total capital managed of the $775,001-900,000
division, (see Table 25), showed an inconsequential change in the per-
cent of debt capital of total capital managed from 1973-1977. The percent
60
TABLE 22
FLOW OF FUNDS
BY TOTAL CAPITAL MANAGED FOR $0-250,000 FARMS FOR 1977
** 6. FAMILY LIVING (Expected) _ 10,710
*** 7. INCOME TAX AND SS (Expected) _ 1,521
9. PRINCIPAL PAYMENT INTERMEDIATE AND LONG TERM _ 1,900
10. AVAILABLE FOR SHORT TERM DEBT SERVICING 770
11. LESS DEPRECLATION (Line 2 above) _ 4,289
12. AVAILABLE LONG RUN GROWTH AND SHORT TERM DEBT RETIREMENT ] (3,519)


1 44
*** (Line 1 less (750 X 4) ) X .0213)
(
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61
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4J
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tO
a. a, S U T-l &o Ji ta H
3 s
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N 41 3 >N 3 3 on J 3 3 H H
u 4> f-l 00 4-1 4-1 4J rH 4-1 U c to i 4) g 0) g
*j H 9) to <o 01 H 4) 10 01 o oi to u_i 01 U-l M y u 01 bO 00
3 to - c 04 3 C 4-i OS XI a o O 4J u 4J M 4-1 c a
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to
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.
62
TABLE 24
FLOW OF FUNDS
BY TOTAL CAPITAL MANAGED FOR $450,001-550,000 FARMS FOR 1977
2 DEPRECIATION + 9,548


1 44
*** (Line 1 less (750 X 4) ) X .0213)
( , ..
Taxable Income Line 1 -(4 dependents X $750)
63
of equity capital of total capital managed showed a substantial decrease
from 1973 to 1977. Conversely, the percent of lease capital of total
capital managed increased considerably over the five year period. The
absolute dollars of total capital managed changed very little from 19 73
to 1977.
and dollar return to labor and management figures are substantially
greater in 1973. Expenses per $100 gross income are least in 1973, and
all years have expenses of less than $100.
from 1973-1977 with an increase in both over the five year period. The
ratios of C & I loans to C & I assets and long term loans to long term
assets followed a similar pattern of fluctuation.
The 1977 flow of funds analysis for the $775,001-900,000 division
(see Table 26), began with a net farm income of $20,223 and had an end
residual of $-4,367 available for long run growth and short term debt
retirement.
An analysis of the total capital managed for the $900,001+ divi-
sion for 1974-1977, (see Table 27), showed inconsequential change in the
percent of debt capital of total capital managed from 1974-1977. The percent
of equity capital of total capital managed decreased from 1974 to 1977
while the percent of lease capital of total capital managed increased
over the four year period.
and dollar return to labor and management figures are negative for all
figures but the 19 75 and 19 77 percent return to total capital and 1977
64
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on
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65
TABLE 26
FLOW OF FUNDS
5. AVAILABLE (Fan. Liv., Debt, Growth) 34,581


1 44
*** (Line 1 less (750 X 4) ) X .0213)
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67
dollar return to labor and management. Those three figures are positive
but low. Average figures are negative for all three measures. Expenses
per $100 gross income are below $100 in 1975 and 19 77. The average
expenses per $100 gross income are $99.
over the four year period as did the ratios of C & I loans to C & I
assets and long term loans to long term assets.
The 19 77 flow of funds analysis for total capital managed of
$900,001+, (see Table 28), started with a net farm income of $19,683 and
had an end residual of $-6,489 available for long run growth and short
Similar tables and flow of funds analyses by total capital man-
aged for the specific divisions of $250,001-350,000; $350,001-450,000;
$550,001-655,000; and $655,001-775,000 can be seen in the appendix, (see
Tables 39-46).
To summarize the analysis of the farm business by total capital
managed for the period 1973-1977, the percent equity capital of total
capital managed decreased substantially, and conversely, the percent of
lease capital increased considerably for the $775,001-900,000 and
$900,001+ divisions.
and dollar return to labor and management figures were highest in 19 73
for all divisions. (Figures were not available for 1973 for the $900,001+
division.) Expenses were below $100 for all divisions but the $900,001+
group of farms. The $900,001+ farms had expenses greater than $100 in
1974 and 1976.

68
TABLE 28
FLOW OF FUNDS
BY TOTAL CAPITAL MANAGED FOR $900,001 + FARMS FOR 1977
8. AVAILABLE DEBT SERVICING (Old P. & New P . & i) 22,866


1 44
*** ( (Line 1 less (750 X 4) ) X .0213)
^
Taxable Income Line 1 -(4 dependents X $750)
69
The $900,001+ farms had the largest absolute dollars of C & I
loans and long term loans, as well as the highest ratio of C & I loans
to C & I assets. The ratio of long term loans to long term assets was
similar among all four divisions.
The flow of funds analyses for each division of total capital
managed showed inadequate dollars available for long run growth and short

CHAPTER VIII
THE APPLICATION OF A PROBLEM USING SPSS
BIVARIATE CORRELATION ANALYSIS
One of the objectives of this research was to analyze the rela-
tionship of interest paid by farmers for borrowed capital to farm income
and expense. This objective was analyzed using SPSS.
SPSS, Statistical Package for the Social Sciences, is an inte-
grated system of computer programs designed for the analysis of social
science data. The system provides a unified and comprehensive package
that enables the user to perform many different types of data analysis
in a simple and convenient manner. It provides the user with a compre-
hensive set of procedures for data transformation and file manipulation,
and it offers the researcher a large number of statistical routines
commonly used in the social sciences.
The SPSS system furnishes three subprograms for bivariate corre-
lation analysis: PEARSON CORR, NONPAR CORR, and SCATTERGRAM. PEARSON
CORR computes Pearson product-moment correlation coefficients for pairs
of interval-level variables. Spearman and Kendall rank-order correla-
tions, appropriate for ordinal-level variables, are calculated by the
NONPAR CORR subprogram. The SCATTERGRAM subprogram prints two variable
scattergrams of data points.
70
71
Bivariate correlation provides a single number which summarizes
the relationship between two variables. These correlation coefficients
indicate the degree to which variation (or change) in one variable is
related to variation (change) in another. A correlation coefficient not
only summarizes the strength of association between a pair of variables,
but also provides an easy means for comparing Che strength of relation-
ship between one pair of variables and a different pair.
Spearmans's rho and Kendall's tau are the two nonparametric
correlations computed by the NONPAR CORR subprogram. Nonparametric
means that no assumptions are made about the distribution of cases on
the variables. These statistics require nothing more than an ordinal
level of measurement and a large number of categories or ranks on each
of the variables. Interval and ratio level variables are frequently
composed of a large number of distinct categories. When this is the
case, scattergrams and the Pearson product-moment correlation (r) can
give us a picture of the relationship. A scattergram is a graph of data
points based on two variables, where one variable defines the horizontal
axis and the other defines the vertical axis.
Scattergrams often suffer from excessive detail. One way to
reduce the detail is to draw a straight or curved line through the scat-
tergram in such a manner that it approximates the pattern of points.
This is quite easy when the pattern is clear and consistent.
If a line with known mathematical properties can be found to
represent the general pattern of the data, then the formula for that line
can serve as a summary of the form of the relationship between the two
variables. In addition, the closer the data points fall to the line that
best summarizes the relationship, the stronger the correlation between
the two variables.

72
The most common statistical procedure for fitting a line to a
scattergram based on interval-level variables is called least-squares
regression. This method is based on the belief that the best- fitting
line is the one in which the vertical distances of all the points from
the line are minimized. The line itself is called the regression line .
That is, if some straight or curved line were drawn through the scatter-
gram, any point which did not fall exactly on the regression line would
be incompletely accounted for. The amount of "error," then, is the
vertical distance from the point to the line. Actually, the distances
are squared and then added together. This summation of the squared error
distances is a measure of the total error involved when the regression
line is used as the prediction of the location of the data points. A
line which minimizes this sum of squared distances will serve as a better
predictor than any other line.
The most common type of regression is linear regression, in which
the objective is to locate the best-fitting straight line. Linear
regression is most commonly used because it gives a simple summary of the
relationship, although not necessarily the "best," and since most vari-
ables of interest to social scientists are assumed to be related in a
straight line manner.
In most social science research it is highly unusual to find a
regression line, especially a straight one which perfectly fits the data.
Whether this is because the true relationship does not quite fit the
curve being drawn or because of errors or imprecisions in collecting the
data, a measure of the "goodness of fit" of the regression line is called
for. The Pearson product-moment correlation coefficient, symbolized by

73
r, serves this purpose for linear regression. When there is a perfect
fit (no error), r takes on the value of +1.0 or -1.0. We can assume
there is a strong linear relationship.
If we square the Pearson's r we get another statistic, denoted
2 2
by r . Actually, r , the coefficient of determination, is a more easily
interpreted measure of association when our concern is with strength of
relationship rather than direction of relationship. (It ranges from a
minimum of to a maximum of 1.0.) Its usefulness derives from the fact
2
that r is a measure of the proportion of variance in one variable
"explained" by the other.
Variance is a measure of the variability, or lack of homogeneity,
in a variable. When the cases cluster close to the mean, variance will
be small; as the cases become more spread out, variance increases. The
objective of correlation analysis is to determine the extent to which
variation in one variable is linked to variation in the other.
In this research, we are not interested in prediction or the
regression line itself. We wish only to know the strength of the rela-
tionship or to obtain the correlation coefficient for statistical pur-
poses. The PEARSON CORR subprogram is very convenient for this situation,
since it can easily compute a large number of correlation coefficients
without taking the time to display a scattergram or compute a regression
equation.
A program was written, which retrieved particular data items
relevant to the list of variables, V4-V18, from the data bank and stored
"Sforman H. Nie et al., SPSS Statistical Package for the Social

Sciences , (U.S.A.: McGraw-Hill, Inc., 1975), pp. 276-280.
74
2
them on disc. Nine data items were placed on a dataset. A total of
six group datasets with 46 data items for each farm were stored on disc
for individual years 1973, 1974, 1975, 1976, and 1977.
In the second part of the bivariate correlation analysis, a
program was written which generated the variables not directly stored in
3
the data bank. One card was punched by the computer for each farm for
each year 1973-1977 containing the manipulated data items in proper vari-
able format. The punched cards for each farm were run in the SPSS sub-
program PEARSON CORK in the third and final part of the analysis. Final
bivariate correlation analysis outputs were received for years 1973,
1974, 1975, 1976, and 1977.
Output from this program includes the correlation coefficient,
the test of significance, and the number of cases, N, upon which the
correlation coefficient was computed.
Significance tests are reported for each coefficient and are
derived from the use of student's t with N-2 degrees of freedom. The
user has an option of selecting a one or two tailed test of significance.
For this research, a one tailed test of significance was used.
When a correlation coefficient cannot be calculated, as will
happen if the variable is either missing for all cases or takes the same
value for all cases, SPSS will assign a value of 99.0, which is a flag
to the user that the coefficient could not be calculated.
Outputs are presented in the form of a matrix. Table 29 shows
Pearson Correlation Coefficients for a five year comparison of bivariate
correlation analysis for years 1973, 1974, 1975, 1976, and 1977.
2 Program assistance by Gary Hanna, Computer Programmer, Depart-

ment of Economics Cooperative Extension Service, Manhattan, Kansas.
J Program
assistance by Kristopher L. Arheart, Manager of Infor-
mation Services at the Kansas State University Computing Center, Manhat-
tan, Kansas.
2 8 8
75
TABLE 29
PEARSON CORRELATION COEFFICIENTS
1973 1974 1975 1976 1977
VI V18 V18 V18 VI
V4 0.5818 0.3852 0.4928 0.5219 0.6068

Gross Farm ( 319) ( 319) ( 320) ( 320) ( 320)
Income S=0.001 SO. 001 S=0.001 SO. 001 S=0.001
V5 0.1775 -0.3762 -0.0635 -0.4101 -0.1205

Net Farm ( 319) ( 319) ( 320) ( 320) ( 320)
Income SO. 001 S=0.001 S=0.129 S=0.001 S=0.016
V6 0.4717 0.4566 0.4500 0.5143 0.5344

Total Capital ( 319) ( 319) ( 320) ( 320) ( 320)
Managed S=0.001 S=0.001 S=0.001 3=0.001 S=0.001
V7 0.7122 0.6742 0.6592 0.6993 0.7248

Total Cash Op- ( 319) ( 319) ( 320) ( 320) ( 320)
erating Expenses SO. 001 S=0.001 S=0.001 S=0.001 SO. 001
V8 0.5128 0.4276 0.4598 0.5709 0.6104
Depreciation ( 319) ( 319) ( 320) ( 320) ( 320)
SO. 001 S=0.001 S=0.001 S =0.001 S=0.001
V9 0.7201 0.6751 0.6655 0.7112 0.7370

Total ( 319) ( 319) ( 320) ( 320) ( 320)
Expenses S=0.001 S=0.001 S=0.001 S=0.001 S=0.001
V10 0.1551 0.0823 0.1053 0.0701 0.0123

Net ( 319) ( 319) ( 320) ( 320) ( 320)
Worth SO. 003 S=0.071 SO. 030 S=0.106 SO. 414
Vll 0.1553 -0.3891 -0.1027 -0.4311 -0.1289

Return to Labor ( 319) ( 319) ( 320) ( 32C) ( 320)
and Management S=0.003 SO. 001 S=0.033 S =0.001 SO. 011
VI 0.3486 0.3504 0.3881 0.4190 0.4648
Land Value- ( 319) ( 319) ( 320) ( 320) ( 320)
Owned S=0.001 3=0.001 S=0.001 S=0.001 SO. 001
V13 0.0955 0.1274 0.1437 0.1975 0.2212
Land Value- ( 319) ( 319) ( 320) ( 320) ( 320)
Rented S=0.044 S-0.011 S=0.005 3=0.001 SO. 001
V14 0.7665 0.7823 0.7930 0.8023 0.7663

Current ( 319) ( 319) ( 320) ( 320) ( 320)
Loans SO. 001 S=0.001 SO. 001 S=0.001 SO. 001
V15 0.6328 0.7128 0.7528 0.6657 0.7709

Long Term ( 319) ( 319) ( 320) ( 320) ( 320)
Loans SO. 001 S=0.001 S=0.001 S=0.001 SO. 001
V16 0.4647 0.2971 0.3346 0.4064 0.4207

Livestock ( 319) ( 319) ( 320) ( 320) ( 320)
Income S=0.001 S=0.001 S=0.001 S=0.001 SO. 001
V17 0.2936 0.1551 0.2281 0.2477 0.3976

Crop ( 319) ( 319) ( 320) ( 320) ( 320)
Income S=0.001 S=0.003 S=0.001 S=0.001 SO. 001
76
A combination of two things is looked at when analyzing the
results, the correlation coefficient and the test of significance. A
subjective value judgment is made to determine the strength of the corre-
lation coefficient, keeping in mind that if the value of r approaches
+1.0 or -1.0, a strong linear relationship can be assumed.
A . 70+ seems to be a relatively good indicator of strength con-
sidering the variables involved in this bivariate correlation analysis.
The test of significance (.05) should be evaluated along with the corre-
lation coefficient. A significance level of .001, indicating a one in
one thousand times chance of occurrence due to randomness appears very
significant. However, if this is paired with a correlation coefficient
of .1775, for example, the significance doesn't seem to be very important.
The correlation coefficient of .1775 doesn't indicate any strength.
Assuming a correlation coefficient of .70+, the significance level must
also be analyzed, before drawing any conclusions.
Comparing the correlation coefficients for years 1973, 1974, 1975,
19 76, and 1977, it is evident that four of the variables exhibit coeffi-
cients of near .70 or above, with a significance level of .001. These
four variables include V7 Total Cash Operating Expenses, V9 Total Ex-
penses, VIA Current Loans, and V15 Long Term Loans.
The program results show that during the time of this study, the
absolute value of the loans increased for the sample farms, resulting in
increased interest expense to the farmers. A combination of low farm
product prices and inflationary input prices may have caused farmers to
borrow more dollars of operating capital. Higher prices paid for pur-
chased inputs is reflected in total cash operating expenses and total
expenses. The farmer's interest expense increases as current and long

77
term absolute loans increase. These four variables represent the strong-
est relationship to the interest variable of the fourteen variables
studied. The other ten variables do not exhibit any strength of rela-
tionship with the interest variable. There is very little change in
correlation coefficients from year to year.
Two variables exhibit a positive correlation coefficient in 1973
but negative coefficients for years 1974-1977, V5 Net Income and Vll
Return to Labor and Management. The positive coefficients in 1973 may
be attributed to higher farm products prices that year resulting in
higher gross and net farm incomes than in years 1974-1977.

2
The coefficient of determination, r , measures the proportion of
2
variance in one variable "explained" by the other. Computing r on Total
Cash Operating Expenses, Total Expenses, Current Loans, and Long Term
Loans, results in approximately 50 to 64 percent of variance in one
variable that is "explained" by the other. This is a comfortable
range of explained variation.
To summarize the analysis, four variables exhibited Pearson
product-moment correlation coefficients (r) of near .70 or above, with
significance levels of .001. These four variables, Total Cash Operating
Expenses, Total Expenses, Current Loans and Long Term Loans, represent
the strongest relationship to the interest variable of the fourteen vari-

2
ables studied. The coefficient of determination, r , computed on the
above four variables results in approximately 50 to 64 percent of vari-
ance in one variable that is "explained" by the other variable.

CHAPTER IX
A PROJECTION OF ADEQUACY OF INCOME
The last objective of this research was to test for the adequacy
of income for future survival of the high 25 percent income farms, the
low 25 percent income farms, and the average income farms. An inflation
rate of 9 percent was applied to the farm expenses, (cash operating ex-
penses and depreciation) and to family living expenses for a projection
five years from now. (1982) (See Table 30.) If gross farm income was
held constant but inflation continued to increase farm and family living
expenses, neither the high 25 percent, low 25 percent, nor the average
net income farms could survive. Negative dollars available for debt
service, income tax, social security, and future growth was the result
for the high 25 percent, low 25 percent, and average net income farms in
1982.
Future survival may be possible by (1) continued growth in size
as long as the returns to capital are positive, (2) use of off farm income
to supplement farm income, (3) increased efficiency as higher yield/acre
or unit, and (4) higher product prices. This analysis cannot project
which of the four will dominate, however, it does show that the high
income group does have the best foundation for financial and production
survival.
78
79
TABLE 30
Adequacy of Income for 1977 Sample Farms
High 25% Low 25% Average
Gross Farm Income 130,288 65,549 87,470
Cash Expenses - 77,495 - 64,948 - 62,817
Depreciation - 12,403 - 10,351 - 10,473
Net Farm Income 40,390 ( 9,750) 14,180
Family Living - 10,710 - 10,710 - 10,710
Available for 29,680 ( 20,460) 3,470

Debt Service,
Income Tax, SS,
and Growth
Projected Adequacy of Income for Sample Farms

in 1982 Applying 9% Inflation to Expenses and
Family Living and Holding Gross Farm Income Constant
High 25% Low 25% Average
Gross Farm Income 130,288 65,549 87,470
Cash Expenses -119,236 - 99,931 - 96,652
Depreciation - 19,084 - 15,926 - 16,114
Net Farm Income ( 8,032) ( 50,308) ( 25,296)
Family Living - 16,479 - 16,^79 - 16,479
Available for ( 24,511) ( 66,787) ( 41,775)

Debt Service,
Income Tax, SS
and Growth
80
Capital needs for growth will increase. If efficiency remains
constant in terms of expense per $100 gross and capital needs necessary
to produce gross income, and if equity capital remains constant then
the chances for growth are dependent upon borrowed capital and rented
capital. Additional rented land can only be available with fewer farmers
or some farms being smaller which would free up land for the larger
farms.
With the 9 percent assumed inflation rate, the high income farms
need to double in size in eight years, (rule of 72). The capital managed
is presently $536,703 and doubling that amount would be $1,073,406, in
inflated dollars. Borrowed capital would be required for the major
portion of the growth with the above assumptions.
Can the financial institutions handle the increased capital
requirements needed by the farms in order to survive? The answer to this
should be the basis for additional study.

CHAPTER X
SUMMARY AND IMPLICATIONS
The analysis of the farm business by net farm income, gross
farm income, farm type, and total capital managed showed the highest
percent return to equity, percent return to total capital, and dollar
return to labor and management in 1973. Most farm prices were at record
high levels in 1973, explaining the substantial returns to the profit-
ability measures. Expense/$100 gross income was least in 1973. The
high 25 percent income farms had over 11 times the percent return to
equity, had almost 6 times the percent return to total capital, and had
7 times the dollar return to labor and management than the low 25 per-
cent income farms. The high 25 percent income farms consistently had
expenses below $75 per $100 gross income, whereas, the low 25 percent
income farms had expenses less than $75 only in 1973. Of the two net
income groups, only the high 25 percent farms had adequate dollars avail-
able for long run growth and short term debt retirement.
The gross farm income analysis showed that as gross farm income
increased, the percent return to equity, percent return to total capi-
tal, and dollar return to labor and management figures improved. Like-
wise, the expense/$100 gross income decreased as gross farm income
increased. The dollars of debt capital used by the farms increased as
81
82
the gross farm income increased. Although there were inadequate dollars
available for long run growth and short term debt retirement for all
divisions of gross farm income, higher gross farm incomes resulted in
higher net farm incomes and lesser negative amounts on the flow of funds
analyses.
and the dollar return to labor and management figures improved as the
dollars of total capital managed increased. Exceptions to the increase
were the total capital managed divisions of S655, 00 1-775, 000, (see Table
45), and $900,001+, (see Table 27). As the dollars of total capital
managed increased, the dollars of debt capital used by the farms in-
creased.
The dairy farm type and the high 25 percent net income farms
exhibited the most overall stability and progress for the period studied
because they were the only groups that had adequate dollars available
for long run growth and short term debt retirement. The dairy and swine
farms were low capital users relative to the cash crop-dryland and cash
crop-cowherd farms.
Overall, the role of lease capital and equity capital changed
during the period. Lease capital increased as a percent of total capital
managed, and equity capital decreased as a percent of total capital
managed.
The projection of adequacy of income for farms in five years,
assuming a 9 percent inflation factor, demonstrated that of the net in-
come farms, the high 25 percent farms have the best chance for survival
because dollars available for debt service, income tax, social security,
and growth were less negative for that group.

83
In the analysis of interest paid by farmers to farm income and
expense, four variables exhibited Pearson product-moment correlation
coefficients (r) of near .70 or above, with significance levels of .001.
These four variables, total cash operating expenses, total expenses,
current loans, and long term loans represent the strongest relationship
to the interest variable of the fourteen variables studied.
With the 9 percent assumed inflation rate, the need for growth
will increase. Future survival of farms may be possible by increasing
yields from the same acres or units; curtailing investments and reducing
or holding constant farm and nonfarm expenses; and higher product prices.
Alternatively, it may mean increasing the size of profitable enterprises
through capital investment or renting, or using off farm income to sup-
plement farm income.
Borrowed capital will be required for the major portion of the
growth. Can the agricultural financial institutions handle the increased
capital requirements needed by farms to survive? The answer to this
question should be the basis for additional study.

APPENDIX
84
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TABLE 32
FLOW OF FUNDS
BY NET FARM INCOME FOR THE HIGH MIDDLE 25% FARMS FOR 1977


1 44 *
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TABLE 34
FLOW OF FUNDS
BY NET FARM INCOME FOR THE LOW MIDDLE 25% FARMS FOR 1977
** * 7. INCOME TAX AND SS (Expected) - 845


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TABLE 36
FLOW OF FUNDS
** * 7. INCOME TAX AND SS (Expected) 96

=
8. AVAILABLE DEBT SERVICING (Old P. & New P . & i) (974 )
10. AVAILABLE FOR SHORT TERM DEBT SERVICING (3,493 )

*** 1 44 '
( (Line 1 less (750 X 4) ) X .0213)

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TABLE 38
FLOW OF FUNDS


1 44
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TABLE 40
FLOW OF FUNDS
12. AVAILABLE LONG RUN GROWTH AND SHORT TERM DEBT RETIREMENT (933)


1 44 '
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*** 1.44
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*
BIBLIOGRAPHY
Arnold, Dr. Lester L. "Capital Planning In This Period Of Increasing

Risk and Uncertainty." Paper presented at the Area Extension
Farm Management Workshop, Hues ton Woods Lodge College Corner,
Ohio, 28 May 1975.
Board of Governors of the Federal Reserve System, Division of Research

and Statistics. Agricultural Finance Databook by Emanuel Melichar
,
and Marian Sayre. Annual Series. Washington, D.C., November,

1977.
Cooperative Extension Service. Farm Management Summary and Analysis

Report Kansas 1977 State Report. Manhattan: Kansas State
,
University, [19 77].
Doll, John P., and Orazem, Frank. Production Economics (Theory With
Applications ) Columbus: Grid, Inc., 1978.
.
Frey, Thomas L. "Agricultural Credit For The 1970s." Paper presented

at the Farm Credit Management Training Seminar, Nebraska Center,
13 May 1971.
Heist erberg, David L. "An Analysis Of Capital Acquisition By Beginning

Farmers." (Unpublished M.S. thesis, University of Missouri,
19 75).
Heisterberg, David L. and Kliebenstein, James B.

, Farm Lending Practices
and Services Provided for Missouri Farmers by Selected Credit
Sources Columbia:
. University of Missouri Agricultural Experi-
ment Station. [19 76].
Hopkin, John A., and Frey, Thomas L. "Financing Agriculture In The

Great Plains." Paper presented to the Great Plains Economic
Resource Committee meeting, Laramie, Wyoming, September 30-0ctober
2, 19 70.
Hopkin, John A.; Barry, Peter J.; and Baker, C. B. Financial Management
in Agriculture Danville:
. The Interstate Printers & Publishers,
Inc., 1973.
Lee, Warren F. "Problems In Financing Canadian Agriculture." Canadian

Journal of Agricultural Economics (July, 1976):
,
32-45.
101
:
102
Melichar, Emanuel. "Financing Agriculture: Demand for and Supply of

Farm Capital and Credit." American Journal of Agricultural
Economics 55 (May 1973): 313-332.
Mendenhall, William; Ott, Lyman; and Larson, Richard F. Statistics

A Tool For The Social Sciences Belmont: Wadsworth
. Publishing
Company, Inc., 1974.
Minnick, Dale L. and Walker, Odell L. "An Assessment of Alternative

Credit Sources for Low Resource, Beginning Farmers." Bulletin
B-728, Oklahoma Agricultural Experiment Station, Stillwater,
Oklahoma, December, 1976.
. "Resource Requirements and Income Opportunities for Beginning

Farmers in Selected Areas of Oklahoma." Bulletin B-729, Oklahoma
Agricultural Experiment Station, Stillwater, Oklahoma, July, 1977.
Montgomery, W. L. and Herr, W. McD. "Factors Affecting Farm Mortgage

Loan Recordings, 1948-68." Agricultural Finance Review 32 (August
1971) 35-41.
Nelson, Aaron G. Lee, Warren F.

; and Murray, William G.
; Agricultural
Finance 6th ed. Ames: The Iowa State University Press, 1973.
.
Nie, Norman H. ; Hull, C. H. Jenkins, J. G.: Steinbrenner, K.

; and ;
Bent, D.H. SPSS Statistical Package For The Social Sciences .
U.S.A.: McGraw-Hill, Inc., 1975.
Penson, John B. Jr. "Toward An Aggregative Measure of Saving and Capital

Finance for U.S. Farm Operator Families.: American Journal of
Agricultural Economics 59 (1) (February 1977) 49-60.
. "External Finance: A Necessary Component in Growth Projections

for Southern Agriculture." Southern Journal of Agricultural
Economics 9 (1) (July 19 77) 25-33.
Pretzer, Don D. "Financial And Management Survival In The Short Run With
Long Run Implications." Paper presented at First and Second Year
Kansas School of Agricultural Banking, 5-10 June, 1977.
Reed, Edward W. ; Cotter, R. V.; Gill, E. K.; and Smith, R. K. Commercial

Banking . Englewood Cliffs: Prentice-Hall, Inc., 1976.
Snider, Thomas E. Farm Capital Formation and Financing In Virginia .
Blacksburg: Virginia Polytechnic Institute and State University

[1970].
U.S. Department of Agriculture, Economics, Statistics, and Cooperatives

Service. Balance Sheet of the Farming Sector 1978 by Carson D. ,
Evans and Richard W. Simunek. Agriculture Information Bulletin

No. 416. Washington, D.C.: Government Printing Office, June 1978.
AN ANALYSIS OF THE CAPITAL STRUCTURE OF SINGLE PROPRIETOR
KANSAS COMMERCIAL FARMS
by
ALONNA M. CASHBAUGH GIACOMINI
B. S., California Polytechnic State University

San Luis Obispo, 1976
AN ABSTRACT OF A MASTER'S THESIS
submitted in partial fulfillment of the
requirements for the degree
MASTER OF SCIENCE
Department of Agricultural Economics
KANSAS STATE UNIVERSITY

Manhattan, Kansas
1979
The issue of financial and management survival of Kansas commer-
cial proprietor farms in the short run with long run implications prompted
the research for this thesis.
The objectives of the research were as follows:
1. To determine the sources of capital currently used by Kansas
farmers.
2. To determine the returns to capital.
3. To determine the interrelationship of loan terras.
4. To demonstrate the relationship of cash flow and profita-
bility.
5. To test for the adequacy of income for farms now and in five
years.
6. To investigate the impact of interest expense paid by farmers.
The sample contained 320 single proprietor Kansas commercial
farms from North Central and Northeast Kansas that had continuous records
on the Farm Management data bank for the period 1973-1977.
The relation of debt, equity, and lease capital managed for an
average of the 320 sample farms for individual years 1973-1977 is pro-
vided for each subset of farms categorized by net farm income, gross
farm income, farm type, and total capital managed. Overall, the role
of lease capital and equity capital used by Kansas farmers has changed.
Lease capital increased as a percent of total capital managed and
equity capital decreased as a percent of total capital managed.
The farms were analyzed concerning the return to equity capital,
return to total capital, and dollar return to labor and management.
The high 25 percent net income farms had significantly larger returns
to capital than the low 25 percent. As gross farm income increased,
returns to capital increased. As dollars of total capital managed in-
creased, returns to capital increased, except the $655,001-775,000 and
$900,001+ divisions.
Loans were analyzed by examining the absolute dollars of current
and intermediate loans, dollars of long terra loans, and ratios of current
and intermediate loans to current and intermediate assets, and long term
loans to long term assets for the sample farms. The dairy and swine
farms were low capital users relative to the cash crop-dryland and cash
crop-cowherd farms.
The 19 77 data for the average of the sample farms was incorporated
in a flow of funds table to arrive at dollars available for long run
growth and short term debt retirement. The dairy farms and the high 25
percent net income farms were the only groups that had adequate dollars
available for long run growth and short term debt retirement.
The flow of funds analysis was utilized to test for the adequacy
of income projected to 1982 for the low, high, and average net income
farms. An assumed inflation factor of 9 percent was applied to farm and
family living expenses . The high 25 percent net income farms were the
only ones with income to service the inflated costs.
Bivariate correlation analysis was used to analyze the strength
of association between the variable interest expense and fourteen vari-
ables. Four variables, total cash operating expenses, total expenses,
current loans, and long terra loans, exhibited Pearson product-moment
correlation coefficients (r) of near .70 or above, with significance
levels of .001.
The farmer has only two sources of capital, namely, his own
equity capital and someone else's capital. Nonequity capital includes
the use of borrowed capital, leasing, and other arrangements or contracts.
The combination of the rapid growth in total capital requirements in
agriculture and a steadily declining number of farms has created a highly
capital intensive environment for farming. Capital and credit needs
will continue to increase. Long run survival for farms may be possible
by increasing yields from the same acres or units; curtailing investments
and reducing or holding constant farm and nonfarm expenses; and higher
product prices. Alternatively, it may mean increasing the size of
profitable enterprises through capital investment or renting, or using
off farm income to supplement farm income.

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Analysis of Capita 00 Gia C

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in 2012 with funding from

ALONNA M. CASHBAUGH GIACOMINI

B. S., California Polytechnic State University

submitted in partial fulfillment of the

requirements for the degree

Department of Agricultural Economics

KANSAS STATE UNIVERSITY

LIST OF TABLES iii

II. REVIEW OF LITERATURE 4

IV. ANALYSIS OF THE FARM BUSINESS BY NET FARM INCOME 26

V. ANALYSIS OF THE FARM BUSINESS BY GROSS FARM INCOME 34

VI. ANALYSIS OF THE FARM BUSINESS BY FARM TYPE 44

VII. ANALYSIS OF THE FARM BUSINESS BY TOTAL CAPITAL MANAGED ... 57

VIII. THE APPLICATION OF A PROBLEM USING SPSS

IX. A PROJECTION OF ADEQUACY OF INCOME 78

X. SUMMARY AND IMPLICATIONS 81

1. Kansas Farm Management Associations 17

1. Outstanding Farm Real Estate Debt, January 1

2. Number of Farms Relative to Net Farm Income, Gross Farm

3. Selected Factors by Net Farm Income for the High 25%

4. Flow of Funds by Net Farm Income for the High 25%

5. Selected Factors by Net Farm Income for the Low 25%

7. Selected Factors by Gross Farm Income for the $0-25,000

8. Flow of Funds by Gross Farm Income for the $0-25,000

9. Selected Factors by Gross Farm Income for the $50,001-

10. Flow of Funds by Gross Farm Income for the $50,001-

11. Selected Factors by Gross Farm Income for the $150,000 +

12. Flow of Funds by Gross Farm Income for the $150,000 +

13. Selected Factors by Farm Type for Dairy Farms from

15. Selected Factors by Farm Type for Cash Crop-Dryland

16. Flow of Funds by Farm Type for Cash Crop-Dryland

17. Selected Factors by Farm Type for Cash Crop-Cowherd

18. Flow of Funds by Farm Type for Cash Crop-Cowherd Farms

21. Selected Factors by Total Capital Managed for $0-250,000

22. Flow of Funds by Total Capital Managed for $0-250,000

23. Selected Factors by Total Capital Managed for $450,001-

24. Flow of Funds by Total Capital Managed for $450,001-

25. Selected Factors by Total Capital Managed for $775,001-

26. Flow of Funds by Total Capital Managed for $775,001-

27. Selected Factors by Total Capital Managed for $900,001+

28. Flow of Funds by Total Capital Managed for $900,000 +

29. Pearson Correlation Coefficients 75

30. Adequacy of Income for 1977 Sample Farms

35. Selected Factors by Gross Farm Income for the $25,001-

36. Flow of Funds by Gross Farm Income for the $25,001-

37. Selected Factors by Gross Farm Income for the $100,001-

38. Flow of Funds by Gross Farm Income for the $100,001-

39. Selected Factors by Total Capital Managed for $250,001-

40. Flow of Funds by Total Capital Managed for $250,001-

41. Selected Factors by Total Capital Managed for $350,001-

42. Flow of Funds by Total Capital Managed for $350,001-

43. Selected Factors by Total Capital Managed for $550,001-

44. Flow of Funds by Total Capital Managed for $550,001-$655,000

45. Selected Factors by Total Capital Managed for $655,001-

46. Flow of Funds by Total Capital Managed for $655,001-

I wish to express my sincere appreciation to Dr. Don D. Pretzer,

my major professor, for his guidance, and suggestions throughout the

during my graduate studies.

who served on my graduate committee.

Recognition is given to Gary Hanna and Kristopher L. Arheart for

their programming assistance.

Finally, I wish to thank my husband, Gary, for his patience and