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Image: Farm Economy

Assets, Debt, and Wealth

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.

The balance sheet provides information on changes in the farm sector’s economic well-being by tracking the financial performance of the U.S. farm business sector as a whole via a series of "snapshots" taken at the end of each year. Over time, changes in the sector’s financial condition offer insights into the factors driving changes in farm sector 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 and Equity Forecast To Fall, Farm Debt To Rise in 2015

Farm assets and equity are both expected to fall in 2015, while farm debt is expected to continue to rise. Since last declining in 2009, sector assets increased rapidly as low borrowing costs, high agricultural commodity prices, and rising farm income led to a strong demand for farm assets, particularly real estate and vehicles/machinery. However, lower agricultural commodity prices are expected to continue in 2015, and a second year of declining farm income and higher expected borrowing costs is expected to put downward pressure on farm asset values. As a result, the value of farm assets is expected to decrease by 3.5 percent in 2015. In contrast, farm debt is expected to grow by 5.8 percent. Given the drop in farm sector assets and increase in debt, farm equity is forecast to fall by 4.8 percent.

See a summary of the balance sheet in the table U.S. farm sector financial indicators, 2011-2015F, Excel icon (16x16) or get the full balance sheet details.

Farm Sector Assets

Historically, farmland values have driven changes in the total value of farm sector assets, due to the large proportion—over four-fifths in 2014—of the sector’s assets held in real estate. Accordingly, the projected decline in farm sector asset values in 2015 is primarily driven by a 2.1-percent decline in the value of farm real estate. Farmland values have increased rapidly in recent years, as high crop prices and low interest rates led to strong demand. With diminishing crop prices and higher expected borrowing costs, farmland values are expected to decline in 2015. The projected decline in farm real estate asset value also reflects a small projected drop in the amount of land in farms, continuing a gradual, historical decline.

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The value of purchased input inventories—which includes pre-purchases of production inputs for future use—is forecast to fall 2.9 percent in 2015. This decrease reflects declining farm income and lower prices for the inputs typically pre-purchased. And, while investments and other financial assets are also projected to drop as a result of lower farm income, vehicle and machinery assets—the second largest farm asset class—are forecast to rise by 1.3 percent in 2015. Capital expenditures on vehicles and machinery are forecast to fall compared to 2014, but investment will continue to outpace capital consumption, leaving the value of the sector’s end-of-year vehicle and machinery stock higher (see table on Gross Capital Expenditures).

The value of crop inventories is also expected to fall substantially in 2015. Lower overall price levels for inventory crops decreased the value of existing inventory stocks. Additionally, the sector is expected to draw down crop inventories by $19.4 billion (32 percent) in 2015.

The value of livestock and poultry inventories is forecast to rise by 1.3 percent relative to 2014, despite the slight decline expected in unit (per-head) values. Cattle herds expanded in 2014, following several years of declines, and are expected to do so again in 2015. Hog inventories are also expected to expand slightly as the effect of the Porcine Epidemic Diarrhea virus subsides. In contrast, highly pathogenic avian influenza (HPAI) is expected to greatly reduce inventory levels for farm chickens—layers, pullets, and other chickens. Since first being detected in December 2014, HPAI has led to a loss of an estimated 48 million birds. Farmers are expected to rebuild their flocks throughout the rest of 2015 and into 2016.

Farm Sector Debt

Farm sector real estate debt is forecast to increase 5.2 percent in 2015, to $209.4 billion. Land prices rose sharply over the last several years, before recently moderating. Although 2015 farmland values are forecast to decline slightly at the sector level and interest rates are expected to rise, agricultural lenders—particularly commercial banks—continue to report strong growth in farm real estate loan volumes throughout 2015.

Nonreal estate debt is forecast to grow more quickly in 2015, rising 6.5 percent to $159.3 billion. The forecast drop in farm income is expected to reduce the amount of cash available to cover expenses, including debt service on nonreal estate debt. Farmers typically borrow against their private equity in periods of declining farm income, and lender reports do suggest an increase in demand for nonreal estate debt financing.

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Farm Sector Solvency Ratios

As a result of the decline in farm assets and continued increase in farm debt, the sector’s debt-to-asset and debt-to-equity ratios are forecast to rise to 13.0 and 14.9 percent, respectively. Even though these measures of sector leverage have increased, each remains low relative to historical levels. As such, although the sector’s financial stress has risen relative to recent years, the sector remains well insulated from the risks associated with commodity production (such as adverse weather), changing macroeconomic conditions, and any fluctuations in farm asset values. See more about financial ratios in the Documentation for the Farm Sector Financial Ratios.

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Farm Business Balance Sheet: August 2015 Versus February 2015 Forecasts

Compared to the February forecast, the 2015 forecast of total assets and equity has decreased. Expectations of lower farm income and higher interest rates have widened the forecast percentage decline in farm real estate assets. The value of machinery/motor vehicle assets and livestock inventories are both expected to grow more slowly relative to the February forecast. The value of crop inventories is now expected to decline sharply in 2015. In contrast, the 2015 forecast for sector debt levels has been revised upward to account for both the higher degree of borrowing observed in 2014 and lower anticipated income in 2015. As a result of August’s upward revision in farm debt levels and downward revision in farm assets, sector equity has also been revised downward, and the debt-to-asset and debt-to-equity ratios are projected to rise relative to the February forecast.

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.

Last updated: Tuesday, August 25, 2015

For more information contact: Farm Income Team