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Near-record harvests in 2007, coupled with improved farm
product demand and high commodity prices, resulted in
near-record U.S. farm incomes and increased spending on
farm real estate, debt reduction, capital investment,
and farm equipment. In 2007, these conditions led to the
strengthening of the farm sector balance sheet. Entering
2008, commodity prices are expected to remain high and
product demand for most commodities is strong. While 2008
is likely to be similar to 2007, both the demand for farmland
and for real estate and nonreal estate loans could moderate
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. Growth in
farm asset and debt values reflect farm investor and lender
expectations about the long-term profitability of farm
sector investments.
The value of U.S. farm business assets is forecast to
increase by about 13.1 percent in 2008 (see table).
The value of farm business real estate assets, which comprise
about 85 percent of farm sector assets, is expected to
rise by 14.9 percent, following a 13.7-percent gain in
2007. (See glossary for
definitions of terms.)
The value of year-end 2008 crop inventories is expected
to rise slightly (up 0.7 percent) from 2007 while the
value of livestock and poultry inventories is expected
to fall slightly (down 0.1 percent). The value of machinery
and motor vehicles is expected to rise by about 2.3 percent
in 2008, based on higher expected sales. The value of
purchased inputs held in onfarm inventory is expected
to increase by about 6.6 percent in 2008 and the value
of financial assets is expected to rise about 5.1 percent.
Farmland Values Continue To Rise in 2008
Farmland and building values (dollars per acre) of farm
businesses rose by about 13.3 percent in 2007 and are
expected to grow by nearly 14.9 percent in 2008. This
solid growth in farm real estate asset values is partly
due to rising returns on farm assets and to declines in
interest rates. Rising income expectations translate into
higher farmland values—in most regions, double-digit
gains for cropland are expected. Gains in ranchland value
are driven by demands from recreational and developmental
uses. Demand for farmland for recreation and nonfarm development
will continue to exert upward pressure on U.S. farmland
values, especially in urban and urbanizing areas.
New housing starts are one of the leading indicators
for the economy in general. The current drop in new housing
starts may dampen the demand for real estate assets (including
farm business real estate assets). However, so far the
sluggish growth in the U.S. housing sector and decreasing
demand for new housing in the economy at large have not
significantly affected the demand for farmland investments.
Farm Debt Increases in 2008
Rising crop values can result in higher potential income
and will likely result in increased real estate loan demand
in row crop producing regions. Nonreal estate agricultural
loan demand is driven by investment in machinery, equipment,
and grain storage facilities. High crop prices and increasing
crop production may lead to a rise in operating loans
as producers boost production expenses to maximize yields.
Farm business debt is anticipated to stand at about $228.0
billion by the end of 2008, up $8.0 billion from 2007
and a new record for the fourth consecutive year. Real
estate debt is expected to rise to $120.8 billion, up
2.8 percent, while nonreal estate debt should be $107.2
billion, up 4.6 percent. Farm real estate debt is expected
to account for 53.0 percent of total farm debt in 2008.
Expectations that nonreal estate debt will expand faster
than real estate debt are based on reported high levels
of demand for short-term financing of machinery, equipment,
and storage facilities. Additionally, nonreal estate debt
is expected to increase as production increases in response
to those crops (corn/soybeans) associated with ethanol
production.
Farm mortgage debt is expected to rise about 2.8 percent
in 2008. From the beginning of 2003 through the end of
2008, total farm debt is expected to have risen by about
$52.8 billion, or more than 30 percent.
 d
Farm Sector Equity Projected To Reach Nearly $2.3 Trillion
in 2008
Farm business equity
is expected to continue rising in 2008 as the increase
in farm asset values exceeds the rise in farm debt. Sector
net worth exceeded $2.0 trillion for the first time in
2007 and is expected to reach nearly $2.3 trillion in
2008, up about $280 billion from 2007. This growing stock
of equity capital can help finance investments in farm
and nonfarm capital, or may be used to restructure outstanding
debt.
Farm Sector Solvency Continues To Improve
Most current borrowers should have little difficulty
servicing their production loans, given high commodity
prices. Farm sector solvency continues to improve, as
measured by the debt-to-equity (D/E) and debt-to-asset
(D/A) ratio. The D/E ratio measures the relative proportion
of funds invested by the creditor (debt) and owners (equity).
The D/A ratio measures debt pledged against farm assets,
indicating overall financial risk. With the average debt-to-equity
ratio falling from 11.0 percent in 2007 to 10.0 percent
in 2008, and the debt-to-asset ratio falling from 9.9
percent in 2007 to 9.1 percent in 2008, farm business
solvency continues to improve. In addition, an increasing
number of machinery, seed, and chemical suppliers are
offering financing for the farm sector's credit needs.
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 rise in net cash income for farm operators,
means that their maximum feasible farm debt and their
unused debt repayment capacity are both expected to increase
in 2008. Farm operator unused debt repayment capacity
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 a lower
proportion of farm operator net cash earnings before interest
and taxes is needed to repay farm debt. By the end of
2008, farm operator DRCU is expected to decline to about
43.4 percent down from 48.3 percent in 2007.
d
See glossary.
See the official
USDA estimates and forecast tables.
See balance
sheet history.
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