Farm Sector Equity, Assets, and Debt Forecast To Fall in 2016
Farm sector equity is predicted to decline 2.4 percent in 2016 to $2.49 trillion, the second consecutive year of declining equity after a record $2.60 trillion in 2014. While farm sector debt is expected to fall less than 1 percent in 2016, the decline in farm equity reflects a larger expected decline (2.2 percent) in the market value of farm sector assets.
The last 2 years' performance reverses the 2009-2014 string of gains, which reflected a farm sector characterized by high crop and livestock prices, growing global demand, emerging markets for biofuels, rising incomes/net cash flows, and favorable credit market conditions. Commodity price declines beginning in 2015 and continuing into 2016 reflect a reversal of many of these favorable agricultural trends.
See a summary of the balance sheet in the table U.S. farm sector financial indicators, 2011-2016F, or get the full balance sheet details.
Farm Sector Assets
Since 2010, farm real estate value (land and buildings) has trended sharply upward and is anticipated to account for 83 percent of total farm assets in 2016. This upward trend reflected rising commodity prices, export demand for U.S. agricultural products, supportive government programs, low-cost and available credit, and general optimism in the U.S. farm sector. The forecast 1.5-percent drop in farm real estate value in 2016 reflects recently reduced incomes and cash flows, resulting in less rosy views of the farm economy.
Since peaking in 2014 (2013 for machinery and vehicles), nonreal estate asset categories are expected to continue their downward trend through 2016. Lower asset values also reflect a continued decline in investment based on an expected continuation of falling commodity prices.
The largest nonreal estate item on the farm sector balance sheet is "machinery and vehicles," which is forecast to represent 8.1 percent of total farm sector asset value in 2016. Declining prices, cash flows, and incomes reduce farmer and rancher demand for new farm machinery and vehicles. Machinery and vehicle asset values are expected to decline 3.3 percent in 2016.
Inventory values are forecast to fall relative to 2015 based on declining commodity prices. Farm inventories are classified as animal/animal products, crops, and purchased inputs. The largest of these three categories, livestock, is expected to account for 61 percent of farm inventory value in 2016. Declining price expectations for animals and animal products reduce the value of livestock inventory assets. The second largest inventory category, crops, is forecast to decline 2.7 percent in 2016, again reflecting the forecast of declining crop prices. Purchased inputs are predicted to decline almost 6 percent in value.
The smallest farm sector nonreal estate category is investment in cooperatives, financial assets, and net accounts receivable. Lower farm prices reduce accounts receivable. Investments and other financial assets are forecast to decline 4.4 percent in 2016, based on reduced farm incomes and cash flows that necessitate withdrawals from savings. Reduced expectations of farm profitability and cash flows also limit the value of investments in farmland and other farm assets.
Farm Sector Debt
Farm debt is composed of outstanding real and outstanding nonreal estate debt. Real estate debt includes debt for the purpose of financing land and buildings, as well as debt secured by farm real estate. Nonreal estate debt includes short-term production and intermediate term loans for the purpose of financing farm machinery, vehicles and equipment, purchase of livestock, and other current operating expenses. Real and nonreal estate debt forecasts include new debt assumed in 2016 and debt obligations incurred in previous years.
Farm real estate debt in 2016 is expected to reach an historic high of $213.6 billion in nominal terms, nearly 2 percent above the previous high set in 2015. The Farm Credit System, the largest lender of farm real estate loans to the farm sector, has seen its retail real estate loan volume grow in the first half of 2016, reflecting continued demand for the purchase of cropland. Commercial bank real estate loan volume for purchasing or improving real estate increased in the first half of 2016; however, loans using real estate as collateral have declined.
Farm nonreal estate debt peaked in 2014, declined in 2015, and is expected to continue to decline through the end of 2016. Declines have been reported by the year's midpoint both for commercial bank and Farm Credit lenders. Commercial banks' largest decline has been in loans for operating expenses incurred both for crop production and care of livestock. The decline reflects reduced loan demand due to reduced profit margins and lower expected farm sector cash flows from reduced commodity prices, as well as significant repayments in early 2016.
Farm Sector Solvency Ratios
Given that debt is predicted to grow faster than farm assets in 2016, the farm sector debt-to-asset ratio and debt-to-equity ratios are expected to nudge upward relative to 2015. This suggests a modest increase in farm financial risk. Still, the farm sector continues to benefit from its strong balance sheet and continued positive (although reduced) cash flows. See more about financial ratios in the Documentation for the Farm Sector Financial Ratios.
Farm Sector Balance Sheet: August 2016 versus February 2016 Forecast
Compared to the February forecast for 2016, the August forecast is improved for assets, debt, and equity. Farm sector assets are forecast to increase in contrast to February's forecast, reflecting improved cash income forecasts for both 2015 and 2016. The improvement in net cash incomes for 2015 and 2016 have also reduced the need for debt financing in 2016 anticipated in February. The improved outlook for 2016 assets and debt raises our forecast for 2016 farm equity (net worth) relative to the February 2016 forecast. As a result, farm sector solvency ratios for August 2016 are projected to improve relative to their February ratios as well.
Farm Balance Sheet Estimates and Forecasts: Caveats
The farm sector balance sheet aims to provide a market value estimate and forecast of farm sector assets, debt/other liabilities, and farm equity (net worth). It differs from individual business and corporate balance sheet accounts, which are based on historical cost accounting concepts. For example, historical cost-based balance sheets show capital assets such as farm machinery and equipment at their original cost less accumulated depreciation. The farm sector balance sheet objective is to estimate or forecast their value if sold in today’s marketplace.
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. Details can be reviewed in the Documentation of the Farm Income and Wealth Statistics data product.