Farm Income and Costs: Assets, Debt, and Wealth

Farm Income and Costs Briefing Room 2009 Farm Sector Income Forecast (August 27, 2009: forecast will be updated; historical estimates will be revised to reflect newly released 2007 Ag Census information) 2007 Farm Sector Income Estimates Farm Business Income Assets, Debt, and Wealth Farms Receiving Government Payments

Reflecting the recession in both the U.S. and world economies, spending on farm real estate, debt reduction, capital investment, and farm equipment is expected to moderate in 2009.

Total assets of the farm sector for 2009 are forecast to be 2.388 trillion, while debt is forecast at 217.1 billion. Equity (assets minus debt) is forecast to be 2.171 trillion in 2009. This results in a debt-to-asset ratio of 9.1 percent and a debt-to-equity ratio of 10.0 percent (see table).

Farm asset, debt, and equity values are expected to continue rising through the end of 2009. The value of U.S. farm business assets is forecast to increase by about 1.6 percent in 2009 compared to 6.3 percent in 2008. The value of farm real estate assets (about 87 percent of farm sector assets) is expected to rise by 2.1 percent in 2009 compared to 6.8 percent in 2008 (see the glossary for definition of terms). The value of debt in the farm sector is projected to increase 0.9 percent in 2009 compared to 1.7 percent in 2008. Farm sector equity is expected to continue rising in 2009 as farm asset values rise faster than farm debt. Farm sector net worth (assets minus debt) is expected to increase 1.7 percent in 2009, after increasing 6.8 percent in 2008.

Farm income and balance sheets reflect slower growth yet relatively strong financial performance as indicated by financial ratios measuring solvency and profitability. For example, farm financial ratios such as the debt-to-asset and debt-to-equity ratios, indicators of sector solvency, are low (9.1 and 10.0 percent, respectively). Also, profitability measures such as the rates of return on farm assets and equity, though lower than in 2008, are relatively high.

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 thus far this decade. But, the demand for farmland and for real estate and nonreal estate loans could moderate by the end of 2009 if declining ethanol profits, increasing production expenses, grain storage shortfalls, and financial market realignments persist.

• Farm Asset Values Projected Up Again in 2009
• Farmland and Farm Building Values Expected To Rise Again in 2009
• Upward Trend in Farm Debt Expected To Continue in 2009
• Farm Business Equity Continues To Grow
• Debt-to-Asset Ratio Continues Downward Trend
• Unused Debt Repayment Capacity Expected To Decrease in 2008

Farm Asset Values Projected Up Again in 2009

Farm business asset, debt, and equity values are expected to continue rising through the end of 2009, but at a notably slower pace than in 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 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 2009 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 can change quickly.

Farmland and Farm Building Values Expected To Rise Again in 2009

Farmland and farm building values rose by about 6.8 percent in 2008 and are expected to rise another 2.1 percent in 2009. Farm asset values are affected both by farm income expectations and interest rates, and also by the non-farm demand for farmland. The farm-related demand for land, machinery and other farm assets is expected to moderate in 2009, given the continued slower expected growth in returns on farm investments. Also, non-farm demand for farmland is expected to ease, given the sluggish demand for housing and the general U.S. economic recession.

Upward Trend in Farm Debt Expected To Continue in 2009

Farm sector debt is anticipated to stand at about $217.1 billion by the end of 2009, setting a new record for the sixth consecutive year (see table). Real estate debt is expected to rise to reach $113.9 billion, up 2.5 percent, while non-real estate debt is expected to be $103.2 billion, a 0.8 percent decrease. Thus, total farm business debt (real estate plus nonreal estate) is expected to rise by 0.9 percent in 2009.

Most borrowers in 2008 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 over 52 percent of total farm debt in 2009, up slightly from 51.7 percent in 2008. Year-to-year changes in net cash income, land values, and interest rates can affect 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 recent years, cash reserves may be available to pay for equipment and input purchases. In addition, farm household income has been rising along with net worth, including net worth from nonfarm sources. Approximately 40 percent of farm operations do not carry debt, indicating the popularity of cash purchases.

Nonreal estate debt is not expected to increase 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. Second, costs of manufactured inputs (energy, feed, seed, fertilizer, and other inputs) are likely to moderate, leveling debt requirements.

Farm Business Equity Continues To Grow

Farm business equity is expected to continue rising in 2009 as farm asset values rise more rapidly than farm debt. At $2.17 trillion, farm sector equity by the end of 2009 is expected to be 1.7 percent higher than in 2008.

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Debt-to-Asset Ratio Continues Downward Trend

Indicators used to measure the solvency of the farm sector remain favorable for 2009. 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 9.1 in 2009, compared with 9.2 in 2008. The debt-to-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 Decrease in 2009

Despite little change in interest rates, rising farm debt coupled with a decrease in farm income should decrease the sector's maximum feasible farm debt and unused debt repayment capacity in 2009. As a result, unused debt repayment capacity of farm operators is expected to decline, after increases in the previous 2 years.

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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, drawing down household assets, or selling farm business assets. An increase in DRCU indicates that a larger proportion of farm operator net cash earnings is needed to repay farm debt. By the end of 2009, farm operator DRCU is expected to increase to about 50.2 percent, up from 44.1 percent in 2008.

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See glossary.

See the official USDA estimates and forecast tables.

See balance sheet history.