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 compared to 2014, while farm debt continues to rise. The value of farm assets is expected to decrease by 2.8 percent in 2015. In contrast, farm debt is expected to grow by 6.3 percent. Given the drop in farm sector assets and increase in debt, farm equity is forecast to fall by 4.0 percent. 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, this trend has been broken and farm asset values are expected to drop along with commodity prices and farm incomes in 2015.
See a summary of the balance sheet in the table U.S. farm sector financial indicators, 2011-2015F, or get the full balance sheet details.
Farm Sector Assets
Historically, farmland values have driven changes in the total value of farm sector assets; over four-fifths of the sector’s assets are held in real estate, including land and buildings. Accordingly, the expected 1.6-percent decline in the value of farm real estate drives the projected decline in farm sector asset values in 2015. Farmland values have increased rapidly in recent years, as high crop prices and low interest rates led to strong demand. With lower commodity prices and income, farm real estate values are expected to decline modestly in 2015. The decline in real estate asset value also reflects a small projected drop in the amount of land in farms, continuing a gradual, historical decline.
Other farm assets—investments and other financial assets, inventories, and machinery/vehicles—are also expected to decline in 2015. Vehicle and machinery assets—the second largest farm asset class—are forecast to decline 1.2 percent as capital expenditures on these items are forecast to decline. The value of purchased input inventories—which includes pre-purchase of production inputs for future use—is forecast to fall 4.2 percent in 2015. This decrease reflects declining farm income and lower expected prices for pre-purchased production items. With less income available in 2015, farmers are expected to draw down some of their financial assets.
Crop and livestock inventories are both expected to fall in 2015, albeit for different reasons. Lower overall prices for inventory crops decreases the value of existing inventory stocks. Additionally, the sector is expected to draw down crop inventories by $5.8 billion in 2015, contributing to the $13.6-billion decline in crop inventory value.
The value of livestock and poultry inventories is forecast to fall by 2.6 percent relative to 2014, primarily due to declining per-head values. Cattle herds are expected to expand in 2015, building on 2014’s expansion after several years of contracting. Hog inventories are also expected to expand as the fallout from the Porcine Epidemic Diarrhea virus subsides. In contrast, highly pathogenic avian influenza (HPAI) is expected to reduce inventory for layers, pullets, and other chickens. Since being detected in December 2014, HPAI has led to a loss of an estimated 48.1 million U.S. 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 6.1 percent in 2015, to $208.2 ($189.6 billion in inflation-adjusted terms). Land prices rose sharply over the last several years, before recently moderating. Although 2015 end-of-year farm real estate values are forecast to decline slightly at the sector level, interest rates have remained accommodating and agricultural lenders—particularly commercial banks and the farm credit system—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 $159.2 ($145.0 billion in inflation-adjusted terms). The forecast drop in farm income is expected to reduce the amount of cash available to cover expenses. Farmers have historically borrowed against their equity in periods of declining farm income, and lender reports continue to suggest an increase in demand for nonreal estate debt financing.
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 12.8 and 14.7 percent, respectively. Even though these measures of sector leverage have increased every year since 2012, each remains low relative to historical levels. As such, the sector appears to remain well insulated from the solvency risk associated with declining commodity prices, adverse weather, changing macroeconomic conditions, and the fluctuations in farm asset values. See more about financial ratios in the Documentation for the Farm Sector Financial Ratios.
Farm Business Balance Sheet: November 2015 Versus August 2015 Forecasts
Compared to the August forecast, the November 2015 forecast of total assets, debt, and equity have increased. Farm real estate asset values are now expected to decline slightly less, despite a lower forecast cash income relative to August. This primarily reflects the expectation of continued accommodating interest rates, at least through the end of 2015. Based on additional marketing pattern data collected since August, crop inventories are also expected to fall less than previously forecast. The value of farm sector machinery/vehicles and livestock/poultry inventories had both been forecast to increase in August; however, both are now expected to decline. The lower forecast for machinery/vehicle asset values reflects lower capital expenditures, while the downward revision in livestock and poultry assets primarily reflects declining per-head values. The 2015 forecast for growth in sector debt has been revised upward to account for lower anticipated income in 2015, accommodating interest rates, and strong loan demand. Primarily as a result of the upward revisions in farm sector asset value forecasts, sector equity has been revised upward, and the farm sector solvency ratios are projected to fall relative to the August forecast.
Farm Balance Sheet Estimates and Forecasts: Caveats
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 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., debt service ratio), and efficiency (e.g., asset turnover ratio).
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.