Assets, Debt, and Wealth
Farm Sector Equity Forecast To Continue To Decline in 2017
Farm sector equity, the difference between farm sector total assets and total debt, is predicted to decline 2.1 percent in 2017 to $2.44 trillion, the third consecutive year of declining equity after a record $2.60 trillion in 2014. Farm sector debt is expected to rise 5.2 percent in 2017, while a 1.1.-percent decline is anticipated in the market value of farm sector assets.
The last 3 years of decline in U.S. farm sector equity 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.
See a summary of the balance sheet in the table U.S. farm sector financial indicators, 2011-2017F, or get the full balance sheet details including the current/noncurrent balance sheet and selected financial ratios.
Farm Sector Assets
The value of farm real estate assets, forecast to be about $2.4 trillion in 2017 (nearly $2.1 trillion in inflation-adjusted terms), accounts for the major part of the value of total farm sector assets—about 84 percent. In 2016 and into 2017, ERS anticipates a slight decline in real estate values. This reflects falling farm profit margins, increased interest rates, and more restrictive debt terms.
Since peaking in 2014 (2013 for machinery and vehicles), nonreal estate asset categories are expected to continue their downward trend through 2017. Contributing factors include commodity price declines that began in 2015 and are expected to continue into 2017.
The largest nonreal estate asset category is "machinery and vehicles," which is forecast to be $217 billion (7.7 percent of total farm sector asset values) in 2017. Declining commodity prices, cash flows, and incomes reduce and delay investment demand by farmers and ranchers for new farm machinery and vehicles. Purchases of new farm machinery and equipment have been declining since 2013, as farmers and ranchers either delay capital investment or peruse the secondhand industrial equipment markets. Machinery/vehicle asset values are expected to decline almost 5 percent in 2017.
Nonreal estate assets also include inventory. Farm inventories include animals/animal products, crops, and purchased inputs that have not yet been sold or used. The largest of these three categories is animals and animal products; the roughly 2-percent decline in their inventory value reflects declining price expectations that offset a forecast increase in inventory quantities in 2017. The second largest inventory category, crops, is forecast to decline in 2017, reflecting both a forecast of declining prices and a large decline in crop inventory stocks. Inventories of purchased inputs are predicted to decline over 8 percent in value, reflecting reduced input prices and quantities purchased.
The smallest component of farm sector nonreal estate value is investments and other financial assets, including accounts receivable. The value of accounts receivable depends on the prices and quantity of products sold but undelivered; anticipated lower crop and animal/animal product prices contribute to an expected decline in accounts receivable. Investments and other financial assets are forecast to decline in 2017, based on reduced farm incomes and cash flows that necessitate withdrawals from savings as well as expectations of increased interest rates. Reduced expectations of farm profitability and cash flows also limit the value of investments in farm cooperatives as alternative investment opportunities become more attractive.
Farm Sector Debt
Farm debt is composed of outstanding real estate and nonreal estate debt. Real estate debt includes debt for the purpose of financing land and buildings, as well as debt assumed for the purpose of nonreal estate purchases secured by farm real estate. Lenders will often require farmers and ranchers to use real estate as collateral for nonreal estate purposed loans during times of increasing risk. Nonreal estate debt includes short-term production and intermediate-term loans for financing farm machinery, vehicles, and equipment; buying livestock; and meeting other current operating expenses. Real and nonreal estate debt estimates and forecasts include new debt assumed in 2017 and debt obligations incurred in previous years.
Farm real estate debt in 2017 is expected to reach a historic high of $240.7 billion in nominal terms ($211.7 billion in inflation-adjusted terms). The annual nominal increase ($16.4 billion or 7.3 percent) in real estate mortgage loans ($10.4 billion or 5.2 percent in inflation-adjusted terms) reflects continued expected demand for cropland combined with anticipated low interest rates, strong balance sheets, substantial accumulated working capital, and strong yields. An additional contributing factor to the increase in farm real estate debt is increasing use of real estate as collateral to secure nonreal estate borrowing. Overall borrowing is sensitive to interest rates, and further increases in interest rates in 2017 could slow the growth in real estate debt.
Farm nonreal estate debt is expected to continue to increase in 2017 (2.0 percent), but at a lower rate than real estate debt (5.2 percent). The slower growth of nonreal estate loans reflects reduced costs for farm inputs and lower commodity prices which reduce demand for farm machinery and vehicles. Commercial banks report significant declines in new loan originations, offset by increases in loan renewals and extensions. Interest rates on farm variable-rate loans also increased in the latter part of 2016, with further increases possible in 2017. Recent increases in bank loan maturities and nonperforming loans indicate an uptick in the risk of farm lending.
Farm Sector Solvency and Liquidity Ratios
ERS calculates multiple ratios as different indicators of the U.S. farm sector’s solvency and liquidity. Solvency ratios—such as debt to asset, debt to equity, and equity to asset—indicate whether debt obligations can be met in a timely manner. Liquidity ratios—such as the current ratio, working capital, working capital to gross revenues, debt service ratio, and times interest earned—are of interest to the farm sector’s short-term creditors who are primarily concerned with a farm or ranch’s ability to meet short-term debt obligations from current assets. Different ratios rely on different financial information to measure various aspects of solvency and liquidity.
Given that debt is predicted to grow and the value of farm assets is anticipated to decline in 2016 and 2017, the farm sector debt-to-asset ratio and debt-to-equity ratios are expected to move upward, and the equity-to-asset ratio is expected to decline. Movements in all three ratios reflect a modest increase in farm financial risk exposure from 2015. The 2017 debt/asset and debt/equity ratios, if realized, would be the highest since 2002. Liquidity ratios have weakened over the past several years and working capital has diminished. The 2017 debt service ratio, which measures the share of production available for debt payments, is at its highest (0.28) since 2002. The times interest earned ratio, which measures the farm sector’s ability to meet interest payments out of current net farm income, would be its lowest (4.4) since 2002. See more about financial ratios in the Documentation for the Farm Sector Financial Ratios.
Farm Sector Current Assets and Debt
Current debt is that which is due by the end of 2017 and requires payment out of a current asset or incurrence of another short-term debt; examples are accounts payable or taxes payable. Current assets are those that are expected to be used up by the farm sector by the end of 2017; examples include cash or inventory. The "current ratio" is current assets divided by current debt and is regarded as a measure of liquidity. The higher the current ratio, the greater the assurance that current liabilities can be repaid within the year.
About 30 percent of farm sector debt is expected to be "current" in 2017 while almost 6 percent of farm assets are classified as current. The farm sector current ratio and working capital have been declining since 2012. However, the farm sector relies mostly on equity financing; the current ratio of 1.41 implies that $1.41 of current assets is available to pay for each dollar of current debt.
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 the value of assets if sold in today's marketplace.