The farm business balance sheet reports estimates of the current market value of farm business sector assets, debt, and equity as of December 31 of a given year. It is called a "balance sheet" because of the accounting relationship: assets – debt = farm equity. Farmers and ranchers, agribusinesses and farm lenders, program administrators, policy analysts, and others often need information on the farm sector’s economic well-being.
The balance sheet helps track changes in financial performance and well-being by providing a series of "snapshots" of the financial condition of the U.S. farm business sector as a whole, and offers insights into the factors driving change. For example, changes in equity (net worth) indicate the extent to which farm business wealth is being generated. Also, when balance sheet and farm income statements are considered 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 All Forecast To Increase in 2013
The most important factors affecting the value of U.S. farm sector assets, debt, and wealth (equity) in 2013 are net income and borrowing costs. The 2011/2012 droughts are unlikely to have an immediate effect on the 2013 sector balance sheet since farm asset values and debt levels tend to be based on expectations of longer term farm profitability. If the droughts are viewed as aberrations, they may not affect longer term expectations. Farm asset values are expected to rise 7.7 percent in 2013 and farm sector debt is expected to increase 3.2 percent. As a result, farm equity is expected to increase by 8.3 percent in 2013 (see table ).
Farm Sector Assets
The projected rise in farm sector assets in 2013 is due mainly to an expected 7.5-percent increase in the value of farm real estate. Despite the 2011 and 2012 droughts, farmland values are expected to continue rising, given the strength of commodity prices, accommodating interest rates, and expectations of continued favorable net returns both from the market and from government programs, including crop insurance. The value of crop inventories is expected to rise by nearly 65 percent over its projected value at the end of 2012. The value of livestock inventories is expected to decline by about 1 percent. The values of machinery and motor vehicles, purchased inputs, and farm financial assets are all expected to increase in 2013.
Farm Sector Debt
Real Estate Debt
The farm real estate debt forecast for 2013 is $149.8 billion, 2.1 percent lower than projected real estate debt outstanding at the end of 2012. Farmland values, sector net cash income, and farm real estate loan interest rates are the three main factors affecting agricultural sector real estate debt markets in 2013. Lower cash earnings and marginal increases in interest rates are expected to lower the demand for debt financed real estate purchases in 2013. New tax provisions that became effective in 2013 could also have a dampening effect on land transactions in 2013.
As land values continue to rise in some parts of the country, the effect on real estate debt depends on the profits that can be made from the land at prevailing interest rates, the availability of farmland for sale, and the alternative investment options available to farmers. The continuing rise in farmland values indicates that it is viewed as a good investment, and the low interest rates prevailing throughout 2012 suggest that funds were available for well-qualified borrowers. The prospect of higher capital gains tax rates and other changes in Federal tax policy in 2013 may also have encouraged sales in the latter part of 2012.
Nonreal Estate Debt
Nonreal estate debt is forecast at $127.6 billion for 2013, up 10.1 percent from 2012. Increases in operating capital requirements and capital spending (mainly for machinery and equipment) are the key factors influencing the expected rise in nonreal estate loan activity, with average loan sizes expected to increase relative to 2012. Farm machinery purchases were resilient in 2012 and with the continuation of tax provisions that allow accelerated depreciation and relatively high earnings, machinery and equipment purchases are projected to remain strong in 2013.
Farm Sector Solvency Ratios
The farm sector's debt-to-asset ratio is expected to decline from a projected 10.6 percent at the end of 2012 to 10.2 percent by the end of 2013. The debt-to-equity ratio is expected to decline from 11.9 percent in 2012 to 11.3 percent in 2013. If realized, these changes would result in new historic lows for both measures, confirming the strength of the farm sector's solvency. With such historically low levels of debt relative to assets and equity, the sector is better insulated from the risks associated with commodity production (such as adverse weather), changing macroeconomic conditions in the U.S and world economies, and any fluctuations in farm asset values that may occur due to changing demand for agricultural assets.
Unused Debt Repayment Capacity Expected To Decrease in 2013
Debt repayment capacity utilization (DRCU) is the percentage of actual farm debt outstanding relative to the maximum feasible farm debt supportable out of farm income in any given year. A value exceeding 100 percent indicates that debt payments must be made by drawing on additional cash sources, such as taking on additional debt, relying on off-farm income, drawing down household assets, or selling farm business assets.
DRCU is expected to increase to 41 percent in 2013. Two factors are contributing to this rise: farm sector debt is forecast to increase by $8.5 billion in 2013 and net cash income is expected to decrease by $12 billion. Even with interest rates expected to remain low, these two factors are expected to decrease the sector's maximum feasible farm debt and unused debt repayment capacity in 2013, which can signal loan repayment problems. Nonetheless, 2013’s DRCU is expected to remain well below levels experienced in the mid-1980s.
Revised 2012F Farm Business Balance Sheet: November 2012 Versus February 2013 Forecasts
The forecast for the value of farm business assets in 2012 has changed since the November 2012 posting to include updated data on the value of crop and livestock/poultry inventories. The new estimate for farm business assets in 2012 is $2.536 trillion, compared with $2.540 trillion in November. No other asset values were revised.
The forecast for the value of farm business debt for 2012 has changed from the November 2012 posting. The new forecast for total farm business debt is $268.9 billion, up from $265.5 in November 2012. The new forecast for real estate business debt is $153.0 billion, up from $146.4 billion; for nonreal estate business debt, the February 2013 forecast is $115.9 billion, down from $119.1 in November 2012.
Revisions are largely due to more recent commercial bank and Farm Credit System (FCS) farm lending data. The Federal Reserve Board’s estimate for commercial bank real estate debt outstanding was $67.5 billion in July 2012; by September 2012, it was $71.6 billion, a difference of $4.1 billion. The Farm Credit Administration reported $80.7 billion in outstanding FCS farm real estate debt at the end of the first quarter of 2012; by the end of the third quarter, its estimate was $83.4 billion, a net change of $2.7 billion. Combined, these two revised estimates account for 86 percent of the $6.6-billion increase in 2012F farm real estate debt from November 2012 to February 2013.
Given the above revisions in total farm business assets and in total farm business debt, the forecast for the 2012 value of farm business equity in February 2013 is $2.268 trillion, compared with $2.274 in November 2012.
Farm Balance Sheet Estimates and Forecasts: Caveats
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 non-farm uses, credit market conditions, and opportunities for non-farm 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.
For data sources and definitions, see the Documentation of the Farm Income and Wealth Statistics data product.