Farm Income and Costs: Assets, Debt, and Wealth

Farm Income and Costs Briefing Room 2008 Farm Sector Income Forecast (Forecast will be updated February 12, 2009) 2007 Farm Sector Income Estimates Farm Business Income Assets, Debt, and Wealth Farms Receiving Government Payments

Near-record harvests coupled with continuing strong farm product demand and high, but moderating, commodity prices should result in continuing record-level U.S. farm incomes. Although remaining at levels above 2007, spending on farm real estate, debt reduction, capital investment, and farm equipment for the remainder of 2008 is expected to moderate.

Total assets of the farm sector for 2008 are forecast to be $2.35 trillion, while debt is expected to be $215.1 billion, resulting in a debt-to-asset ratio of 9.2 percent (see table).

Farm asset, debt, and equity values are expected to continue rising through the end of 2008. The value of U.S. farm business assets is forecast to increase by about 6.3 percent in 2008. The value of farm real estate assets (about 87 percent of farm sector assets) is expected to rise by 6.8 percent (see the glossary for definition of terms). The value of debt in the farm sector is projected to increase 1.7 percent in 2008. Farm sector equity is expected to continue rising in 2008 as farm asset values rise faster than farm debt. Farm sector net worth (equity, or assets minus debt) is expected to be over $2.1 trillion in 2008, up from about $2.0 trillion in 2007.

Farm income and balance sheets reflect strong financial performance. Steady growth in farm income, in nonfarm demand for farmland, and accommodating interest rates and generally rising (although volatile) commodity prices have supported continued appreciation in land values and in farm business wealth. The demand for farmland and for real estate and nonreal estate loans could moderate by the end of 2008 if declining ethanol profits, increasing production expenses, grain storage shortfalls, and financial market realignments persist.

Farm Asset Values Projected Up Again in 2008

Farm business asset, debt, and equity values are expected to continue rising through the end of 2008 (see table). Growth in farm asset and debt values reflects farm investor and lender expectations about the long-term profitability of farm sector investments. The USDA-ERS farm business balance sheet estimates are as of December 31 of each year. Forecasts for farm real estate, nonreal estate assets, and farm debt for 2008 are based on the most current data available. Given the volatility of financial and commodity markets—and the fact that energy markets, commodity markets, and the macro economy are linked—these forecasts are tentative. For example, farmland prices are fundamentally driven by investors’ expectations about future returns on their investments, and these expectations change.

Farmland and Farm Building Values Rise 6.8 Percent in 2008

Farmland and farm building values (dollars per acre) rose by about 8.9 percent in 2007 and are expected to rise another 6.8 percent in 2008. The demand for farm land will continue to exert upward pressure on U.S. farmland values, especially in urban and urbanizing areas. However, the demand for farmland, machinery, and other farm assets has moderated since 2007, given the continued sluggish growth in the U.S. housing sector.

Nonreal Estate Asset Values Also Rise in 2008

Due primarily to rising commodity prices, the value of year-end 2008 crop inventories is expected to rise sharply (up 21.6 percent from 2007) while the value of livestock and poultry inventories is expected to drop 0.1 percent. The value of machinery and motor vehicles is expected to rise by about 0.9 percent in 2008, based on higher expected sales. The value of purchased inputs held in on-farm inventory is expected to increase by about 4.1 percent in 2008, and the value of financial assets is expected to rise about 4.5 percent.

These forecasts are tentative for several reasons. First, farmers and ranchers’ expectations about future prices and returns are not static. For example, the values and composition of farm financial assets are changing, reflecting the current turmoil in financial markets. Also, it is difficult to forecast the value of purchased inputs. Farmers and ranchers may be waiting to purchase fertilizers when fertilizer prices are more favorable. Thus, changing expectations about prices and returns affect their decisions about the timing and makeup of input purchases. Therefore, forecasts of the values of both real estate and nonreal estate assets, although based on the latest and best-available data, are still forecasts.

Upward Trend in Farm Debt Expected To Continue in 2008

Farm sector debt is anticipated to stand at about $215.1 billion by the end of 2008, setting a new record for the fifth consecutive year (see table). Real estate debt is expected to rise to $111.1 billion, up 3.1 percent, while non-real estate debt is expected to be $104.0 billion, a 0.3 percent increase. The recent rise in loan balances can be at least partially attributed to farmers’ positive view of the sector’s future. Strong farmland markets of the last several years attest to farmers’ long-term confidence. While many farmers have financed expansions with cash purchases of adjacent properties, real estate debt continues to rise.

Most borrowers in 2008 have had little difficulty cash-flowing their production loans, given relatively high commodity prices. Nonreal estate debt is shifting toward Farm Credit System and commercial bank lending sources, which accounted for 84 percent of nonreal estate farm debt in 2007, up from 79 percent in 2004.

Farm real estate debt is expected to account for almost 52 percent of total farm debt in 2008, up slightly from about 51 percent in 2007. Rising crop values can result in higher potential income and will likely result in increased real estate demand in row crop producing regions. Year-to-year changes in net cash income, land values, and interest rates can each have substantial impact on real estate debt levels.

Nonreal estate agricultural loan demand is driven by investment in machinery, equipment, and seasonal production inputs. Like real estate loan demand, nonreal estate loan demand also depends on both recent and expected levels of net cash income from farm and nonfarm sources. With record levels of net cash income in 2007, cash reserves may be available for purchases of nonreal estate items. In addition, farm household income has been rising along with net worth, including net worth from nonfarm sources. As much as 40 percent of nonreal estate transactions may be on farm operations that do not carry debt, indicating the popularity of cash purchases.

Nonreal estate debt is expected to increase only slightly for two reasons. First, the high level of earnings resulting from record farm income over the past 2 years may enable many producers to self-finance intra-year production expenses. However, interest rates have fallen to their lowest levels since 2003. As such, borrowed capital may be cheaper and explain increases in nonreal estate debt. Second, the prospect of rising costs of manufactured inputs (energy, feed, seed, fertilizer, and other inputs) is directly related to higher debt requirements.

Farm Business Equity Continues To Grow

Farm business equity is expected to continue rising in 2008 as farm asset values rise more rapidly than farm debt. In today’s dollars, $2.35 trillion in assets minus $215 billion in farm debt yields a sector net worth (equity) of about $2.13 trillion. Farm sector equity by the end of 2008 is expected to be almost 6.8 percent higher than in 2007.

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Debt-to-Asset Ratio Continues Downward Trend

Indicators used to measure the solvency of the farm sector remain favorable for 2008. The debt-to-asset ratio indicates the relative dependence of farm businesses on debt and their ability to use additional credit without impairing their risk-bearing ability. The lower the debt-to-asset ratio, the greater the overall financial solvency of the farm sector. The debt-to-asset ratio is forecast to be 9.2 in 2008, compared with 9.6 in 2007. The debt-to-total asset ratio has declined steadily from 15.2 percent in 1998, and stands in sharp contrast to 1985 when it was 22.2 percent. (see definitions of balance sheet terms).

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Unused Debt Repayment Capacity Expected To Increase in 2008

Despite the increase in farm debt expected in 2008, the anticipated decline in interest rates on farm loans, combined with the expected modest rise in net cash income for farm operators, should increase the sector’s maximum feasible farm debt and unused debt repayment capacity. The unused debt repayment capacity of farm operators is expected to reach its highest dollar level since 1970.

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Debt Repayment Capacity Utilization (DRCU) is the ratio of farm operators’ actual farm debt relative to their maximum feasible farm debt in any given year. DRCU is a measure of the ability of farm operators to repay their farm debt over time solely through the production and sale of farm products and services. A DRCU estimate exceeding 100 percent indicates that debt payments must be made by drawing on additional cash sources, such as taking on additional debt, earning off-farm income, or selling farm assets. A decrease in DRCU indicates that a lower proportion of farm operator net cash earnings is needed to repay farm debt. By the end of 2008, farm operator DRCU is expected to decline to about 43.2 percent, down from 48.1 percent in 2007.

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See glossary.

See the official USDA estimates and forecast tables.

See balance sheet history.

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