Economic and Financial Conditions Bode Well for U.S. Agriculture
Mathew Shane and
Mitch Morehart
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U.S. agriculture entered the most
recent recession better positioned than most U.S. industries, was
less affected by the recession than most other U.S. industries, and
is likely to continue to do well in the years ahead.
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The farm sector was bolstered by
several years of strong income growth, rising farmland values, and
low dependence on debt, so both farmers and farm lenders were in a
relatively strong financial position.
- Strong demand for U.S. agricultural
products, led by the expansion of developing-country markets, an
extended period of depreciation in the real exchange rate, and
growing demand for biofuels, has bolstered both the performance and
prospects of
U.S. agriculture.
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This article is drawn from . .
.
The 2008-09 Recession and Recovery:
Implications for the Growth and Financial Health of U.S.
Agriculture, by Paul Sundell and Mathew Shane,
WRS-1201, USDA, Economic Research Service, May 2012.
You may also
be interested in . . .
Trends in U.S. Farmland Values and
Ownership, by Cynthia Nickerson, Mitch Morehart,
Todd Kuethe, Jayson Beckman, Jennifer Ifft, and Ryan Williams,
EIB-92, February 2012.
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U.S. Agriculture
Entered the Recession
Fundamentally Sound
Bolstered by strong
demand from developing countries, the falling dollar, and the
growing importance of biofuels, U.S. agriculture enjoyed several
years of high prices and strong demand prior to the 2008-09
recession. The same factors helped maintain high agricultural
prices throughout the recession. Agriculture's relatively strong
balance sheets and low overall use of debt entering and exiting the
recession provide a financial base for future growth.
Because of strong demand
for agricultural commodities and products, real U.S. farm income
has been robust since 2004. This period of growth enabled farmers
to improve their overall liquidity and strengthen their balance
sheets. Gains in farm income also increased farmland values by
raising expectations of future income flows. Inexpensive and
accessible credit lowered the cost of financing farmland purchases
and contributed to the surge in farmland values. As a result, farm
financial assets grew by 31 percent and farm equity by 32 percent
between 2004 and 2012.
Farm income dipped
slightly in 2009 for most farm businesses. However, farmers were
cushioned by good liquidity and low debt levels. The combination of
rising farm income and land values, along with the likelihood of
continued low interest rates over the near term, points toward farm
business stability over the next few years.
Due to continued growth
in farm earnings, farmland lost far less value during the recession
than commercial and residential real estate. Some concerns arose
that volatility in urban real estate markets over the last decade
would spill over into markets for farmland, since farmland near
urban areas derives value from its development potential. Findings
from a recent ERS study of farmland values and ownership suggest
otherwise. During the housing market downturn (2007-09) that
affected all but the Plains and Delta regions, farmland values
generally declined by less than rural housing values. And during
the "boom" years of the U.S. housing market (2001-06), farmland
values grew faster than rural housing values in many States.
Farmers Limit Credit
Use
U.S. farmers, by being
cautious with debt financing, have generally avoided the problems
in other sectors that are heavily reliant on debt. The
debt-to-asset ratio for farm businesses has trended lower since the
mid-1980s and is far lower than the ratios of corporate and
noncorporate nonfarm businesses. Low debt use--as reflected in the
debt-to-asset ratio and the interest coverage ratio--reduces both
variability in net income and incentives for excessive risk taking.
A high percentage of assets financed through debt indicates greater
leverage and more financial risk. Overusing leverage leaves farms
at risk, since the cost of financing this borrowing (interest
payments) can outweigh the return provided by the expansion. Lower
use of debt leverage by farms indicates fewer potential conflicts
between lenders and farm business owners over risk and asset
choices.
Interest coverage ratios,
which are calculated by dividing a company's earnings before
interest and taxes by the interest expenses, show a similar picture
of relatively low debt burdens for farmers. Since 1990, interest
coverage ratios for farm businesses have exceeded those of nonfarm,
noncorporate businesses and corporate businesses. The relatively
low debt use by agriculture reflects the conservative nature of
farmers and their primary lenders, which has reduced the
sensitivity of agricultural returns and equity to fluctuations in
the general business cycle.
Within the farm sector,
the use of debt leverage--and thus exposure to liquidity
problems--tends to be higher for larger farms, livestock producers,
and younger farmers. However, farm delinquency and default rates
are expected to be stable in 2012-13; interest rates are expected
to remain low for highly qualified farm borrowers; and farm
commodity prices are expected to remain relatively strong. Based on
data from the Federal Reserve Bank of Kansas City and the Farm
Credit System, farmers remained cautious in their use of debt in
2011, as non-real estate farm debt was roughly unchanged in the
first half of 2011 and farm real estate debt grew a modest 2.2
percent.
U.S. Agriculture Has
Exhibited Much Less Financial Stress Than Other
Sectors
Agriculture has benefited
from the health of its two primary lenders: rural commercial banks
and the Farm Credit System. These two institutions held over 85
percent of farm debt in 2010. This institutional stability has
enhanced the farm sector's ability to obtain credit and favorable
interest rates.
Easy credit standards
during the late 1990s and early 2000s, coupled with the severity of
the recession, produced loan delinquency (30 days past due for
commercial banks and 90 days for the Farm Credit System) and
default rates near or above historical peaks for most categories of
nonagricultural loans. While delinquency and default rates on
agricultural loans at commercial banks have increased, they have
remained far lower in relative terms than nonagricultural loans.
Farm Credit System farm loan rates--and delinquencies--have also
been lower than those at commercial banks. While delinquency rates
on agricultural loans have risen moderately since mid-2008,
charge-off rates (loans and leases removed from the books and
charged against loan loss reserves) have remained below 0.40
percent.
Although farm loan
delinquency and charge-off rates rose during 2008 and 2009, they
remained moderate compared with other types of loans and low
compared with agricultural loan delinquency and charge-off rates in
the late 1980s. The decline in farm delinquency rates in 2010,
coupled with high farm income in 2010 and 2011, indicated that farm
loan charge-off rates were moving back toward long-term trend
levels.
U.S. Agricultural
Exports Bolstered by Dollar Depreciation and Strength
of Developing-Country Markets
Real U.S. agricultural
exports fell 2.0 percent in 2009, led by exports of high-value
products, with fresh beef and dairy products falling 6 and 39
percent, respectively. But U.S. agricultural exports during the
period fared better than nonagricultural exports like durable
goods, which are more sensitive to changes in real foreign
disposable income.
U.S. agricultural exports
rebounded quickly in 2010 and 2011, rising 18 percent in both years
in nominal dollars relative to the previous year and exceeding $136
billion in 2011. The growth in the nominal value of post-recession
exports was about twice the historical average between 1998 and
2007, the decade preceding the recession.
Two basic factors
underlie the increase in the rate of export growth. First, U.S.
agricultural export growth is increasingly dependent on developing
countries and benefited from their relatively strong economic
performance during 2008-11. The developing-country share of U.S.
agricultural exports rose to more than 60 percent in 2011, up from
40 percent in 1998. Differences in economic growth rates between
developed and developing countries have been increasing for some
time, and the 2008-09 recession reinforced this pattern. While
economic recovery lags in developed countries like the United
States, the European Union, and Japan, developing countries have
generally been able to sustain or resume relatively high rates of
growth. Although near-term growth has slowed in China, India, and
some other developing countries as they try to contain inflationary
pressures, overall prospects are for relatively high sustained
growth in developing-country markets.
The second factor in the
growth of U.S. agricultural exports is the depreciation of the U.S.
trade-weighted dollar between 2002 and 2012
(www.ers.usda.gov/data/exchangerates). The U.S. real exchange rate
has been depreciating since 2002, boosting U.S. agriculture and
supporting high agricultural prices during the recession. This is
the longest period of sustained depreciation since the beginning of
the floating exchange rate era in 1973.
U.S. Agriculture
Poised for Long-Term Growth
The world economic
recovery was underway in 2011 and 2012 and is likely to continue in
2013, with developing countries in Asia, Latin America, and Africa
leading the way. But the world economy and U.S. agriculture still
face challenges. The U.S. economic recovery can be expected to be
weaker following a relatively deep recession with profound
financial consequences. The Eurozone crisis is likely to dampen
growth prospects in developed countries, and the falling value of
the euro against the dollar is constraining U.S. agricultural
exports to EU markets. As a result, although farm sector receipts
and farmland values remain strong, growth has slowed from the
pre-recession period.
Still, U.S. agriculture
weathered the recession and uneven economic recovery better than
other industries. From both a trade and financial perspective,
agriculture was and is better positioned than most U.S. industries.
While the world economy is dynamic and increasingly competitive,
U.S. agriculture's natural comparative advantage, low interest
rates, competitive exchange rate, and solid balance sheet suggest
its continued strong presence in world markets for the foreseeable
future.
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