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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, Debt, and Equity Forecast To Moderate in 2015

The rate of growth in total farm assets, debt, and equity is forecast to moderate in 2015 compared to recent years, while nonreal estate debt is expected to rise more quickly. The slowdown reflects the expectation of a second year of declining net farm income, higher borrowing costs, and slipping farmland values. As a result, the value of farm assets is expected to increase 0.4 percent in 2015, compared to a 3.1-percent increase in debt. Over the 10-year period ending in 2013, these measures average a compound annual average growth rate of 5.6 and 4.3 percent, respectively. Despite the forecast drop in farmland values and slower overall asset growth, the sector continues to generate wealth, albeit at a slower pace than in recent years. See details in the table U.S. farm sector financial indicators, 2011-2015F. Excel icon (16x16)

Farm Sector Assets

Historically, farmland values have driven changes in the total value of farm sector assets, due to the large proportion—82.6 percent in 2013—of the sector’s assets held in real estate. Accordingly, the projected moderation in farm sector asset growth in 2015 is primarily driven by a 0.8-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 receding crop prices and higher expected borrowing costs, farmland value growth is forecast to moderate in 2014 before declining in 2015. The projected decline in farm real estate asset value also reflects a 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 6.4 percent in 2015. This decrease reflects declining income, lower prices for inputs typically pre-purchased, and less projected acreage planted in 2016 (leading to fewer pre-purchased inputs). Financial assets are also projected to drop as a result of lower farm income.

The value of other asset categories are all projected to increase. Vehicle and machinery assets—the second largest farm asset class—are forecast to rise by 5 percent in 2015. Capital expenditures on vehicles and machinery are forecast to fall but investment will continue to outpace capital consumption, leading the value of the sector’s capital stock higher (see table on Gross Capital Expenditures).

Crop and livestock inventory values are both expected to increase due to higher overall commodity price levels relative to 2014. The value of livestock inventories will rise by 18.6 percent relative to 2014 as livestock prices per head continue to grow rapidly. Cattle herds are expected to begin expanding in 2015—following several years of declines—as low feed costs and improved weather conditions for grazing make expansion more cost effective. Hog inventories are also expected to expand as the effect of the Porcine Epidemic Diarrhea virus subsides.

Farm Sector Debt

Farm sector real estate debt is forecast to increase 2 percent in 2015, to $186.4 billion, following the expected 2.6-percent growth in 2014. Land prices have risen sharply over the last several years in principal crop producing regions due to strong demand for crop production; however, price gains are expected to moderate in 2014 and decline modestly in 2015 as farm commodity prices and net income, particularly in corn producing regions, retreat from recent levels. Interest rates are also expected to continue climbing in 2015, raising the cost of debt-financed land purchases.

In contrast to real estate debt and total assets, nonreal estate debt is forecast to grow more quickly in 2015, rising 4.5 percent to $141 billion. The change primarily reflects the interaction between falling income and rising input price levels, while expected increases in interest rates play a smaller role. The forecast drop in farm income is expected to reduce cash available to cover operating expenses, creating upward pressure on nonreal estate debt. Production input prices are expected to rise 3.4 percent as decreases in the cost of fuel, fertilizer, and feed are more than offset by price increases for other inputs, further heightening the need for debt financing. Additionally, farmers have historically borrowed against their equity in periods of declining farm income. Lender reports suggest an increase in demand for nonreal estate debt financing, with loan volumes increasing greatly toward the end of 2014.

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Farm Sector Solvency Ratios

As a result of farm assets growing slower than debt, the sector’s debt-to-asset and debt-to-equity ratios are forecast to rise to 10.9 and 12.2 percent, respectively. Even though these measures of sector leverage have increased, each remains low relative to historical levels. 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, and any fluctuations in farm asset values. See more about financial ratios in Charts and Maps of U.S. Farm Balance Sheet Data, and the Documentation for the Farm Sector Financial Ratios.

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Farm Business Balance Sheet: February 2015 Versus November 2014 Forecasts

Compared to November, the 2014 forecast of total assets and equity has increased. Real estate assets and commodity inventories are expected to grow more slowly, while the value of machinery/motor vehicles and financial assets are both expected to increase. The forecast of sector debt is unchanged. As a result, February’s upward revision of total farm assets results in a higher forecast of farm equity in 2014, and the debt-to-asset and debt-to-equity ratios are projected to fall relative to the November 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, February 10, 2015

For more information contact: Mitch Morehart