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
marketsand the fact that energy markets, commodity
markets, and the macro economy are linkedthese 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.
Asset and debt data sources |
Farm asset data |
Variable |
Source |
Real estate assets |
USDA-NASS, August 4, 2008, Land
Values and Cash Rents: 2008 Summary; Land in Farms
report, January 2008; AELOS and USDA-ARMS surveys |
Livestock and poultry |
USDA-NASS and USDA-ERS farm income
statement |
Machinery and motor vehicles |
Census of Agriculture, USDA-ERS
estimates and USDA-ARMS survey |
Crops stored |
USDA-NASS and ERS farm income
statement |
Purchased inputs |
USDA-ARMS survey |
Financial assets |
USDA-ARMS survey; Economic
Report of the President, 2008 |
Farm debt data |
Variable |
Source |
Farm Credit System |
Farm Credit System – Quarterly
Information Statement online |
Farm Service Agency |
Administrative data: FSA 616
Report as of 9/30 and extrapolated to 12/31 |
Commercial banks |
Board of Governors of the Federal
Reserve System, Agricultural Finance Databook, table
B.1. |
Insurance companies |
Data collected online from the
Life Insurers Fact Book |
Individuals and others |
Ag Resource Management Survey
– expanded to sector level estimate using
1999 AELOS distribution to account for absence of
landlords in ARMS data |
Notes: For each of
the above listed real estate debt data elements
an adjustment is applied which reduces the total
amount of farm debt by the amount of loans that
are applied to operator dwellings that are not part
of the farm business. ARMS is the source for the
amount of debt owed for operator dwellings owned
by farm businesses. Both real estate and nonreal
estate debt is also adjusted for nonfarm uses based
on responses to the most recent ARMS survey. |
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.
d
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).
d
d
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.
d
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.
d
Definitions
of selected financial ratios |
Ratio |
Computational method |
Significance |
Liquidity |
Debt servicing |
(Interest + principal payments)/(gross
cash farm income) |
Measures share of farm business’s
gross income needed to service debt |
Efficiency |
Asset turnover |
(Gross cash farm income)/(farm business
assets) |
Measures gross farm income generated
per dollar of farm business assets |
Solvency |
Debt to assets |
(Farm business debt/farm business assets) |
Measures debt relative to farm business
assets, indicating overall financial risk |
Debt to equity |
(Farm business debt/farm business equity) |
Measures the relative proportion of
funds invested by creditors (debt) and owners (equity) |
Profitability |
Rate of return on assets (equity):
current income |
Returns to farm assets from current
income/farm business assets(equity) |
Measures the per-dollar return on farm
assets (equity) |
Capital gains |
Capital gains (adjusted for inflation
in current year) on farm business assets |
Measures the per-dollar (accrued) return
on farm assets (equity) from (accrued) capital gains |
Total return on assets (equity) |
Total: current income + (accrued) capital
gains |
Measures the total per-dollar return
on farm assets (equity) |
Operating profit margin |
(Returns to farm assets)/(gross cash
farm income) |
Measures the profits earned per dollar
of gross cash income |
See also: Farm
balance sheet definition of financial ratios and
the USDA-ERS farm income web site: Financial
ratios: liquidity and efficiency; solvency and profitability. |
See glossary.
See the official
USDA estimates and forecast tables.
See balance
sheet history.
Return to the top of page.
|