Farm Income and Costs: Assets, Debt, and Wealth

Overview 2011 Farm Sector Income Forecast (Updated 11/29/2011) 2010 Farm Sector Income Estimates (Updated 8/30/2011) Farm Business Income (Updated 11/29/2011) Assets, Debt, and Wealth (Updated 11/29/2011) Farms Receiving Government Payments Data Sources Recommended Readings Recommended Data Glossary

Farm Sector Assets and Equity Forecast To Increase in 2011; Debt To Decrease

The farm sector balance sheet estimates for 2011 reflect higher cash receipts for both crops (16.0 percent) and livestock (16.9 percent), higher production expenses (12.0 percent), and higher returns to operators (29.0 percent) relative to 2010. The three most important factors driving higher asset values (including farm real estate) are higher expected income from production assets, favorable borrowing costs, and expected growth of future returns on these investments. Farm real estate and non-real estate asset values are expected to rise from $2.19 trillion in 2010 to $2.34 trillion in 2011 (up 6.8 percent). Farm business debt is expected to fall from $246.9 billion in 2010 to $242.5 billion in 2011. As a result, farm equity is expected to increase from $1.94 trillion in 2010 to $2.10 trillion in 2011. The debt-to-asset and debt-to-equity ratios are expected to decline, indicating that the farm sector overall is more solvent than it was in 2010 (see table).

Farm Business Assets

Farm sector assets are expected to rise by 6.8 percent in 2011, due mainly to a projected 7.2-percent increase in the value of farm real estate. Other asset categories expected to increase in 2011 include machinery and equipment values (up 4.3 percent), the value of crop inventories (up 11.1 percent), purchased inputs (up 3.0 percent) and financial assets (up 8.1 percent). The value of livestock and poultry inventories is forecast to decline by 1.5 percent. Farmland values should continue to rise given the strength of commodity prices, accommodating interest rates, expectations of continued favorable net returns both from the market and from government programs, and growth in agricultural exports.

In 2010, the value per acre of farmland and farm buildings in the U.S. is estimated to have risen by 6.6 percent, based on estimates of farmland and building values as reported in Land Values: 2011 Summary, USDA-NASS, August 4, 2011. However, average values per acre vary considerably by State. This reflects the wide variation in expected income from production assets, borrowing costs, and expected growth of future returns—both farm and nonfarm— across the United States. Farmland markets are highly localized.

In 2011, the value per acre of farmland and farm buildings in the U.S. is forecast to rise by 6.8 percent. This estimate is developed using  time-series (historic) data, and reports on farmland market trends from sources across the country. The forecast model uses a variety of data, including:  estimates of farmland and building values as reported by NASS, interest rates, returns per acre, exchange rates, and other input data to generate out-year forecasts of land and building value per acre.  Forecasts from alternative model specifications are evaluated and compared with those from other sources, including individual state land-grant universities, Federal Reserve district banks, and USDA’s Agricultural Resource Management Survey (ARMS). 

Farm Business Debt

Farm sector debt is currently estimated at $242.5 billion for 2011, a decrease from the $246.9 billion reported in 2010. Real estate debt accounted for the bulk of the difference and is estimated to be $132.1 billion for 2011 down 3 percent from $136.3 billion while non-real estate changed only marginally.

Stable current economic conditions support credit availability for creditworthy borrowers, but this outlook is subject to a variety of factors influencing credit markets. Stock market fluctuations resulting from international monetary collapses could cause monetary shortfalls, interest rate spikes, or export market changes over which individual agricultural borrowers or lenders have no control. Meanwhile, less qualified borrowers could face constraints accessing credit or higher interest rates relative to those paid by fully qualified borrowers. Factors that affect the profitability and risk of both farm lenders and borrowers can affect agricultural lending markets in a variety of ways. For example, the need to maintain adequate profits can lead banks to adjust the spread between the interest rate that they pay to acquire funds and the interest rates they charge on their agricultural loans. At the same time, creditworthiness of agricultural borrowers is subject to a changing business environment. Banks monitor collateral requirements and change loan terms as agricultural loan quality changes.

Non-Real Estate Debt

Overall, non-real estate debt for 2011 remains essentially unchanged from the 2010 level at $110.3 billion. The main component in the non-real estate model is working capital (current assets less current liabilities). The current value of assets is notably high, especially for crop farmers, partly due to their current holdings of financial assets and unsold crop inventories. With higher working capital and near-historic lows in interest rates, many potential borrowers can self-finance their input and equipment purchases. For livestock producers, higher feed costs are expected to increase average loan size, as their net cash income has not been as high in recent years as it has been for crop producers.

Recent Agricultural Resource Management Survey (ARMS) data indicate that the debt maturities of newly acquired non-real estate loans are trending toward the middle of the maturity distribution, with smaller percentages of loans having shorter or longer maturities than in earlier years. This may reflect conflicting preferences among lenders and borrowers. On one hand, lenders may prefer not to extend long-term loan commitments when future interest rates are uncertain. At the same time, farm operators prefer to lock in low interest rates for the longest term possible to minimize costs. Amid historically low interest rates, agricultural lenders are almost certainly pushing more variable-rate loans and loans with shorter maturities.

Real Estate Debt

Farm real estate debt is estimated to be $132.1 billion for 2011. While down 3 percent from 2010, debt has increased 22.3 percent in the past 5 years while land values have increased 22.2 percent.

Three main factors will affect agricultural sector real estate debt markets for the remainder of 2011: farmland values, sector net cash income, and farm real estate interest rates. As land values continue to rise, the effect on real estate debt depends on the profits that can be made from the land at prevailing interest rates. Farm operators appear willing to pay up to maximum values for land based on expected profits accruing from the land’s best use. Limited availability of prime farm land available for sale in many areas of the country increases competition for available farmland. Interest rates are expected to remain low throughout 2011 and funds remain available for well-qualified borrowers. At current levels of commodity prices, expected net cash income will remain at or near record levels, providing good prospects for debt repayment and possibilities for self-financing. Beyond that, high levels of cash reserves point toward reducing farm real estate debt.

Anecdotal evidence suggests that 15-20 percent of the collateral used for agricultural operating loans is provided by farm real estate, and this likely provides risk coverage for larger operating loans. Although it does not appear to have decreased real estate loan activity in 2010 or 2011, the volume of non-real estate loans could limit the total loan carrying potential of an individual farm business.

Farm Sector Equity (Net Worth)

The value of the farm sector's equity (net worth) is forecast to rise from $1.94 trillion in 2010 to $2.10 trillion in 2011. The estimated increase in farm sector equity is largely due to an estimated 7.2-percent increase in the value of farm real estate.

Farm Sector Solvency Ratios

The farm sector's debt-to-asset ratio is expected to decline from 11.3 percent in 2010 to 10.4 percent in 2011, and the debt-to-equity ratio is expected to decline from 12.7 percent to 11.6 percent. These declines indicate that the farm sector's solvency position is strong and improving.

Farm Balance Sheet Estimates and Forecasts: Caveats

Factors Affecting Farmland and Farm Asset Values Vary Across the Country

Asset values and farm debt outstanding are fundamentally driven by current and expected returns on investments in farmland and other farm capital, and by interest rates. These factors vary across the country, reflecting differences in expected net returns on crop and livestock portfolios, in credit market conditions, and in opportunities for non-farm employment and investments.

Current farmland values are driven not only by current returns and borrowing costs but also by investors' expectations about future returns. These expectations are affected by market factors (including expected commodity and input prices), the U.S. economy's growth rate, world supply and demand factors, the dollar exchange rate, inflation, and government farm policies (including government price support payments, crop insurance and farm credit programs, and the ethanol mandate). Unexpected changes in any of these factors can change investor expectations, which in turn can affect the current value of farm assets.

Credit Conditions in Farming Regions and in the Macro Economy Are Dynamic

Farm asset prices are driven not only by current and expected future returns from agricultural production, but also by interest rates on farm loans. Going forward, future interest rates on farm investments will depend on the strength of the U.S. macro economy, the Federal Government's monetary and credit policies, and on the extent to which market interest rates reflect the full opportunity costs of capital, including inflation and other risk premiums.

Interest Rates Going Forward

Interest rates closely link U.S. agriculture to national financial markets in various ways. First, interest rates affect the value of outstanding debt and thus the solvency of the sector. Second, agriculture is particularly sensitive to interest rates because it is one of the most capital-intensive industries in the economy. Interest rates can influence variable production costs by raising or lowering the payments required for shortrun planting-to-harvest borrowing. They also affect the cost of long-term capital investments. Third, interest rates are a key determinant of land values, the base of wealth in agriculture.

Based in part on the activities of the Federal Reserve in the latter part of 2010, interest rates in the overall economy are low and are expected to remain so through the remainder of 2011. Interest rates going forward will be affected by supply and demand forces in domestic and global financial markets.

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Unused Debt Repayment Capacity Expected To Increase in 2011

Debt repayment capacity utilization (DRCU) is the ratio of actual farm debt outstanding relative to the maximum feasible farm debt supportable out of farm income in any given year. DRCU is a measure of the ability of the farm sector to repay 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.

Three factors are contributing to a significant fall in the DRCU ratio in 2011: farm sector debt is estimated to decrease from $246.9 billion in 2010 to $242.5 billion in 2011; interest rates are expected to remain low; and the sector is expected to experience another large increase in income this year on top of last year's increase. Together, these factors should significantly increase the sector's maximum feasible farm debt and unused debt repayment capacity in 2011.

By the end of 2011, farm sector DRCU is expected to decrease to about 38 percent, down from 46 percent in 2010. A decrease in DRCU indicates that a smaller portion of net cash earnings is needed to repay farm debt. This decrease is expected to approach the 1973 low of 37 percent and is the second lowest DRCU since 1970.

If DRCU declines, that leaves more farm income available for business investments, including capital purchases, capital replacement, alternative investments, debt reduction, or self-financed production expenditures. At the sector level, the decision on which of these investment options to pursue, if any, depends on relative costs and returns. For individual farmers, management preferences and risk tolerance also come into play.

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See glossary.

See the official USDA estimates and forecast tables.

See balance sheet history.