Farm Income and Costs: Assets, Debt, and Wealth

Overview 2009 Farm Sector Income Forecast (Updated 8/27/09) 2008 Farm Sector Income Estimates (Updated 10/06/09) Farm Business Income Assets, Debt, and Wealth Farms Receiving Government Payments Data Sources Recommended Readings Recommended Data Glossary

Farm Sector Assets, Equity Decline in 2008 and 2009

Many significant changes have occurred since USDA-ERS last updated the farm sector balance sheet. Some reflect changes in market fundamentals, and some are based on new, revised estimates from the USDA's 2007 Census of Agriculture, the USDA-NASS June Agricultural Survey, and the 2008 USDA Agricultural Resource Management Survey (ARMS). As a result, this balance sheet provides a more up-to-date assessment of the sector's economic performance. Farm balance sheets for the most recent time periods are available (see table).

The Farm Sector Balance Sheet for 2008

Increased volatility in agricultural commodity markets (corn, wheat, soybeans), increasing costs of farm inputs (feed, fuel, and fertilizer), and regionalization in land markets combined to create a somewhat unusual set of market forces that shaped the 2008 farm sector balance sheet. On the asset side, equity capital was abundant as net farm income remained at, or near, record levels for the fifth consecutive year. Debt capital remained available at reasonable interest rates from a variety of lenders, although borrowing requirements tightened in 2008.

After a longrunning increase in farm asset values and in farm equity, farm asset values fell from record levels of $2.055 trillion in 2007 to $2.005 trillion in 2008 (down 2.4 percent). Farm asset values are affected both by farm income expectations and interest rates, and also by the nonfarm demand for farmland. Therefore, as investors' expectations about future returns on farm assets fell in 2008, farm asset values declined. The farm-related demand for land, machinery and other farm assets moderated in the second half of 2008, given downturns in major crop prices. Nonfarm demand for farmland weakened, reflecting the overall economic recession.

The estimated amount of debt in the U.S. farm sector was $240.0 billion in 2008, a nominal record high. Debt had been steadily rising since the late 1980s and each year between 2005 and 2008 set a new nominal record in farm sector debt. While farm debt increased by $26 billion (12.1 percent) from 2007, it is important to look at the real estate and non-real debt components. Real estate debt accounted for 69.2 percent of the overall change in total farm debt outstanding during 2008, while non-real debt made up the remaining 30.8 percent. The increase in real estate borrowing may be for two reasons. Money previously invested elsewhere might have shifted toward farmland investment as financial market conditions deteriorated. And as loan quality deteriorated, lenders might reasonably have sought more security (i.e., real estate) for their loans.

Although nominal farm debt set records in 2007 and 2008, this fact alone is not a reason for great concern. The growth in debt through 2007 was outpaced by growth in agricultural assets and equity. Net farm income, although variable, has trended upward (until 2009). This growth in income, along with competition among farmers, investors, and others for available farmland, drove up the value of agricultural land, which accounts for nearly 86 percent of farm assets. With a larger collateral base, the farm sector remains in a better position to support farm debt than it was 20 years ago. Lenders held debt equivalent to one-fifth of farm assets in 1986; at the end of 2007, they had a claim on about one-tenth of the total value of farm assets.

Based on the most recent data available from a variety of sources, farm sector debt is estimated at $240 billion in 2008 (up about 12 percent from 2007), while farm agricultural assets (down 2.4 percent) and equity (down 4.1 percent) are estimated to have declined. Although the debt-to-asset and debt-to-equity ratios rose in 2008, these solvency indicators are still favorable and are considerably below the levels experienced during the 1981-86 "farm financial crisis."

The Farm Sector Balance Sheet for 2009F

The farm sector balance sheet forecast reflects current market fundamentals: declining cash receipts, declining but still high production expenses, and declining returns on farm investments, leading to declines in the value of the farm sector's assets, debt, and equity (net worth). Forecasts of declining cash receipts for crops and livestock, continuing volatility in agricultural commodity markets, and high costs of farm inputs (feed, fuel, and fertilizer) imply that returns on farm investments in land and in other farm capital will continue to decline in 2009. Although interest rates are low and stable, farm investors continue to face tight credit requirements.

Considerable uncertainty surrounds the forecasts of farm assets, debt, and equity in 2009, given the volatility of commodity, energy/input, and financial markets. On the asset side, the overall level of farm business equity capital is expected to fall from 2008 to 2009, as farm sector asset values decline from $2.005 trillion in 2008 to $1.936 trillion in 2009F (a 3.5-percent decline). This reflects lower expected returns on farm investments. The values of livestock/poultry, machinery/equipment, and crop inventories are expected to decline, while the values of financial assets and of purchased inputs are expected to rise slightly in 2009.

Debt capital is expected to remain available to qualified borrowers at reasonable costs while less qualified borrowers may expect to pay higher interest rates. Farm sector debt is expected to decline by about 2.5 percent from about $240 billion in 2008 to $234 billion in 2009. As a result, farm sector equity (assets minus debt) is expected to decline from $1.765 trillion in 2008 to $1.702 trillion in 2009 (a 3.6-percent decline).

The forecast decline in farm sector equity in 2009 is largely due to an expected 3.9-percent decline in the value of farm business real estate, which excludes the value of operator and other dwellings but includes the value of land and other real estate of the farm business. This estimate reflects the continued softening of farmland markets due to lower expected earnings on farm investments, tighter credit and greater overall market uncertainty.

Although the farm sector's debt-to-asset and debt-to-equity ratios are expected to rise in 2009, these solvency indicators are still considerably below the levels experienced during the 1981-86 "farm financial crisis."

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Unused Debt Repayment Capacity Expected To Decrease in 2009

Despite a projected decrease in farm debt in 2009, an expected large drop 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, reaching a level not seen since 2006.

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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 are needed to repay farm debt. By the end of 2009, farm operator DRCU is expected to increase to about 63 percent, up from 48 percent in 2008. This level of DRCU has not been seen since the 1980s.

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See glossary.

See the official USDA estimates and forecast tables.

See balance sheet history.