The balance sheet of the agricultural sector reports the estimated current market value of farm business sector assets, debts, and equity as of December 31. Despite representing the sector rather than individual farms, the term “balance sheet” is used because the data reflect the same accounting relationship: assets – debt = farm equity.
The sectorwide balance sheet provides information on the farm sector’s economic well-being by tracking changes in financial performance via a series of "snapshots" of the sector’s financial condition. These snapshots can offer insights into the factors driving changes in the sector’s well-being. For example, changes in equity (net worth) indicate the extent to which farm business wealth is being generated. Additionally, by considering the balance sheet and farm income statements jointly, financial ratios can be estimated reflecting the sector's solvency (e.g., debt-to-asset ratio), profitability (rate of return on assets), liquidity (e.g., farm business debt service coverage ratio), and efficiency (e.g., asset turnover ratio).
Farm Sector Assets, Debt, and Equity All Forecast To Increase in 2013
The most important factors affecting the value of U.S. farm sector assets, debt, and wealth (equity) in 2013 are net farm income and borrowing costs. The 2011/2012 droughts are unlikely to have much effect on the 2013 sector balance sheet since farm asset values and debt levels tend to be based on expectations of longer term farm profitability. Farm asset values are expected to rise 7 percent in 2013 and farm sector debt is expected to increase 3.3 percent. As a result, farm equity is expected to increase by 7.4 percent in 2013. See details in the table of U.S. farm sector financial indicators, 2009-2013F.
Farm Sector Assets
The projected rise in farm sector assets in 2013 is due mainly to an expected 7.5-percent increase in the value of farm real estate. Farmland values are expected to continue rising, given the relative strength of commodity prices, accommodating interest rates, and expectations of continued favorable net returns both from the market and from government programs, including crop insurance. The value of crop inventories is expected to rise by nearly 43 percent over its projected value at the end of 2012. The value of livestock inventories is expected to continue the recent trend of declines, falling by over 1 percent. The value of machinery and motor vehicles is forecast to increase by nearly 9 percent, after rising more than 12 percent in 2012. With higher output expectations, particularly for crop producers, purchased inputs are forecast to increase almost 7 percent in 2013. Farm financial assets are expected to decline by over 10 percent in 2013, due to declining net cash income depleting working capital and higher prices for production inputs.
Farm Sector Debt
Real Estate Debt
The 2013 forecast for farm real estate debt is $180.2 billion, which is 4.2 percent above the estimate of real estate debt outstanding at the end of 2012. High farmland values and expected turnover in farmland ownership are the principal factors affecting the forecast, while net cash income, interest rates, and government payments contribute less to the overall estimate.
Land prices have risen sharply over the last several years in crop growing regions due to strong commodity demand and the continued perception by both borrowers and lenders that land is a good investment. Decreases in interest rates have reduced the cost of financing land purchases, partly offsetting higher prices. Low interest rates continued through 2012 into 2013; in addition, lenders generally report ample funds for well-qualified borrowers. The amount of real estate debt is also influenced by the degree of debt-financing that occurs. As net cash income declines, so does the amount of funds available for down payments, putting upward pressure on the amount of real estate purchases covered by debt financing.
Nonreal Estate Debt
Nonreal estate debt for 2013 is forecast at $130.0 billion, up 2.1 percent from 2012. Over the past few years, the amount of operating capital needed for most farming enterprises has risen dramatically, along with production expenses and capital (machinery and equipment) purchases. Much of the rise in the need for operating capital is a result of the rise in input prices. Continuing price level increases have led to the average size of both production and operational loans increasing in most areas of the country. Increasing average loan sizes are largely behind the expected rise in nonreal estate loan activity in 2013.
Farm Sector Solvency Ratios
The farm sector's debt-to-asset ratio is expected to continue its decline, falling from 10.7 percent at the end of 2012 to 10.3 percent by the end of 2013. The debt-to-equity ratio is expected to decline from 12.0 percent in 2012 to 11.5 percent in 2013. If realized, these changes would result in new historic lows for both measures, confirming the strength of the farm sector's solvency. With such historically low levels of debt relative to assets and equity, the sector is better insulated from the risks associated with commodity production (such as adverse weather), changing macroeconomic conditions in the U.S and world economies, and any fluctuations in farm asset values that may occur due to changing demand for agricultural assets.
2013 Farm Business Balance Sheet Forecasts: November Versus August
While there have been revisions to the forecast for some major components of farm sector assets since August, the largest component—real estate—is still expected to increase by 7.5 percent. The forecast value of livestock inventories is also unchanged from August. However, the forecast value of crop inventories increased to $43.4 billion from $42 billion in August. Financial assets are also forecast to decline by a greater amount than expected in August (10.2 percent compared to 7 percent). As a result, the forecast increase in total farm sector assets fell from 7.1 percent in August to 7 percent in November.
Farm debt is forecast to increase by more than expected in August (3.3 percent compared with 2.7 percent). This change is driven by increases in the forecast level of real estate debt. Farm real estate debt is now forecast to increase by 4.2 percent, compared to a 3.1 percent forecast increase in August. The nonreal estate debt forecast remains unchanged.
With the August release, the farm sector balance sheet underwent a comprehensive review of data sources and estimation methods that resulted in revisions back to 2002. The breadth and scope of these revisions can be gleaned from the Documentation of the Farm Income and Wealth Statistics data product. For data sources and definitions, see the Documentation for the Farm Sector Balance Sheet.
Farm Balance Sheet Estimates and Forecasts: Caveats
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 vary across the country and over time, reflecting differences in expected net returns on crop and livestock portfolios, demand for farmland for nonfarm uses, credit market conditions, and opportunities for nonfarm employment and investments. Future interest rates depend on the strength of the U.S. and world economies, U.S. fiscal and monetary policies, and on other factors subject to change.