The agricultural sector’s balance sheet reports the estimated current market value of farm business sector assets, debts, and equity as of December 31. While the term "balance sheet" is usually applied to individual firm accounts, it is used here to represent sectorwide finances because the data reflect the same accounting relationship: assets - debt = farm equity.
Farmers and ranchers, agribusinesses, farm lenders, program administrators, policy analysts, and others often need information on the farm sector’s economic well-being. The balance sheet of the agricultural sector provides this information by tracking changes in the financial performance and well-being of the U.S. farm business sector as a whole via a series of "snapshots" of the sector’s financial condition, and offering insights into the factors driving changes. 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 Forecast To Moderate in 2014
The rate of growth in farm assets, debt, and equity is forecast to moderate in 2014 compared to recent years. The slowdown in growth is a result of an expected decline in net farm income relative to 2013, higher borrowing costs, and moderation in the growth of farmland values. As a result, the value of farm assets is expected to rise 2.3 percent in 2014, while farm sector debt is expected to increase 2.7 percent. Over the last 10 years, the annual growth in each of these measures has averaged 6.6 and 4.4 percent, respectively. Despite the slowdown, the sector continues to generate wealth as farm equity is expected to increase by 2.3 percent in 2014. See details in the table U.S. farm sector financial indicators, 2010-2014F.
Farm Sector Assets
Historically, farmland values have driven changes in the total value of farm sector assets, due to the large proportion of the sector’s assets held in real estate. Accordingly, the projected rise in farm sector assets in 2014 primarily represents an expected 2.9-percent increase in the value of farm real estate. Growth in farmland values is forecast to slow in 2014 relative to recent years due to reduced farm income expectations, lower crop prices, and higher interest rates. Nonetheless, continued growth in the value of farm real estate reflects expectations of favorable net returns from both the market and government programs, including crop insurance, in 2014 and the future.
The value of crop inventories is expected to rise by 12.9 percent relative to 2013, due to large inventory increases for soybeans and corn. The large rise in crop inventory values reflects expectations that farmers will choose to store more of their production given anticipated above-average yields—including record harvests for soybeans and corn—and lower crop prices. The value of livestock inventories is expected to decline by 3.2 percent, continuing a string of recent declines. The continued drop in livestock inventories is primarily driven by a reduction in cattle, calf, and hog herds. Record high prices for these commodities have led farmers to continue culling their herds, while feed prices—despite easing in 2014—remain high as a result of continued drought conditions. Additionally, the porcine epidemic virus has put downward pressure on hog inventories by both reducing hog litter sizes and increasing piglet mortality.
The value of most other farm sector assets in 2014 is expected to remain similar to 2013. The value of purchased input inventories—which includes pre-purchases of production inputs for use in the future—is forecast to decrease by 2.6 percent in 2014 in response to the expected fall in this year’s net farm income. Additionally, the amount of production inputs invested in winter plantings is expected to be lower this winter due to the ongoing drought in California. The value of financial assets is forecast to increase 2 percent relative to 2013.
The value of machinery and motor vehicles is expected to fall by 2.4 percent in 2014, ending a string of strong annual increases since 2010. The projected decline primarily reflects an expected decrease in capital expenditures (see table on Gross Capital Expenditures). Capital expenditures are expected to decrease as a result of (1) declining revenue, (2) a drop to $25,000 in the amount of capital investment that can be currently deducted for tax purposes, and (3) the expiration of accelerated first-year (“bonus”) depreciation. Even with the decrease, the value of machinery and motor vehicle assets will have increased nearly 85 percent over the last decade.
Farm Sector Debt
Real Estate Debt
Farm sector real estate debt is forecast to increase 3.5 percent in 2014, to $181.9 billion. This represents a slight drop in the average growth rate (3.9 percent) observed over the past 5 years. The slower growth is attributable to the expected slowdown in farmland price increases and an expected increase in interest rates relative to 2013.
Land prices have risen sharply over the last several years in principal crop producing regions due to strong demand for crop production; however, land price gains are expected to moderate in 2014 as farm commodity prices and net income, particularly in corn growing regions, retreat from recent levels. Interest rates are also expected to increase slightly in 2014, raising the cost of debt-financed land purchases. However, real estate debt is still expected to grow as both borrowers and lenders continue to view land as a good investment, supporting continued demand for real estate loans and the availability of funds.
Nonreal Estate Debt
Nonreal estate debt is forecast to grow more slowly than real estate debt in 2014, rising 1.6 percent to $131.6 billion. The change primarily reflects interaction between falling farm incomes and input price levels, while an expected increase in interest rates relative to 2013 plays a smaller role. An expected drop in farm income creates upward pressure on nonreal estate debt levels by decreasing the cash available to cover operating expenses. Production input costs are expected to rise moderately, increasing operating expenses and placing further upward pressure on the need for debt financing. But capital purchases are expected to decline this year, dampening demand for debt.
Farm Sector Solvency Ratios
In 2014, the farm sector's debt-to-asset and debt-to-equity ratios are forecast to remain essentially flat at 10.8 and 12.1 percent, respectively. Both ratios remain near their post-1970 historical lows. Despite the expected slowdown in asset growth, the historically low level of debt relative to assets and equity reaffirms the farm sector’s strong financial position. As such, the sector remains well insulated from the risks associated with commodity production (such as adverse weather), changing macroeconomic conditions in the United States and abroad, as well as any fluctuations in farm asset values that may occur due to changing demand for agricultural assets.
Farm Business Balance Sheet: August 2014 Versus February 2014 Forecasts
The August 2014 forecast reflects several revisions to major components of last February’s farm sector asset and debt forecasts. Compared to February’s outlook, total asset and equity levels are forecast to grow slightly less (2.3 percent rather than 2.4 percent) in 2014, while the growth in sector debt is expected to increase.
The majority of the change in the sectorwide total asset forecast from February to August is attributable to the decrease in expected inventory asset values. The value of farm inventory assets in 2014 is now forecast to be $140.2 billion, down $5.8 billion from the February forecast. Other asset value forecasts remain little changed from February.
Total farm sector debt is now forecast to rise 2.7 percent in 2014, up from the 2.3-percent forecast in February. This reflects an expected increase in the growth rate of both real and nonreal estate debt, by 0.3 and 0.6 percentage points, respectively, from February’s expectations. The change for real estate debt reflects stronger than anticipated demand for real estate loans. Meanwhile, the increase in nonreal estate debt growth primarily reflects increases in the expected cost of production inputs since February.
Because of the increase in the forecast percentage change of farm debt and reduction in the forecast growth in assets, the forecast for 2014 debt-to-asset and debt-to-equity ratios rose slightly from February to August.
In addition to the forecast changes, farm sector real estate asset values were revised from 2008 to 2012 in order to incorporate final estimate information from NASS on land values and land in farms. The value of machinery and motor vehicle assets was revised in 2012 to incorporate newly available census of agriculture information. Reflecting these changes, farm sector equity (assets – debt), and the sector debt-to-asset, debt-to equity, and equity-asset ratios were also revised.
Farm Balance Sheet Estimates and Forecasts: Caveats
With the August 2013 release, the farm sector balance sheet underwent a comprehensive review of data sources and estimation methods that have resulted in revisions back to 2002. The breadth and scope of revisions can be gleaned from the Documentation of the Farm Income and Wealth Statistics data product.
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.