Assets, Debt, and Wealth
Farm Sector Equity (Wealth) Forecast To Remain Steady in 2020
Farm sector equity—the difference between farm sector total assets and total debt—is forecast to rise 1.1 percent in 2020 (in nominal terms) to about $2.69 trillion and decline 0.1 percent in inflation-adjusted dollars. In nominal dollars, the expected increase in farm assets ($45.5 billion) is greater than the expected rise in farm debt ($16.6 billion). When adjusted for inflation, farm sector assets are expected to increase $7.6 billion, while farm sector debt is expected to rise $11.4 billion.
See a summary of the balance sheet in the table U.S. farm sector financial indicators, 2013-20F, or get the full balance sheet details, including the current/noncurrent balance sheet and selected financial ratios.
Farm Assets Expected To Remain Stable When Adjusted for Inflation
The 2020 farm assets forecast of $3.12 trillion represents a 1.5-percent increase from 2019 in nominal dollars. The value of farm real estate assets (land and its attachments) is forecast at $2.57 trillion, and accounts for 82.3 percent of 2020 farm sector assets. USDA's Economic Research Service anticipates farm real estate values will increase 0.9 percent in 2020 in nominal terms. When adjusted for inflation, the value of farm real estate assets is expected to be relatively unchanged, declining 0.3 percent, the sixth year that real estate values have just kept up with inflation at the national level. The value of nonreal estate farm assets is expected to increase 4.2 percent in 2020 (or increase 2.9 percent in inflation-adjusted values). Investments and other financial assets are forecast to increase $21.4 billion, or 24.5 percent in 2020 in nominal dollars. Machinery and vehicle assets are expected to increase $8.4 billion, or 3.0 percent, and inventories are forecast to decline $7.7 billion, or 4.7 percent.
Farm real estate debt is expected to reach $283.0 billion in 2020, a 6.1-percent annual increase in nominal terms and a 4.8-percent rise in inflation-adjusted dollars. Farm real estate debt as a share of total debt has risen since 2010 and is expected to account for 65.0 percent of total farm debt in 2020. Farm nonreal estate debt is expected to increase 0.2 percent in nominal terms to $152.1 billion in 2020. Since its peak in 2014, nonreal estate inflation-adjusted debt has decreased 6.6 percent.
Farm Sector Solvency is Expected To Weaken, Liquidity and Profitability Ratios To Improve
Solvency is a measure of the ability of a farm or ranch operation to satisfy its debt obligations when due. Popular measures of solvency include the debt-to-asset ratio, debt-to-equity ratio, and equity-to-asset ratio. The farm sector debt-to-asset ratio and debt-to-equity ratio are expected to continue their slow increases from 2012. The equity-to-asset ratio is expected to continue its decline from 2012, reaching its lowest level since 2002.
Liquidity is the ability to transform or convert assets to cash quickly to satisfy short-term obligations when due without a material loss of value or price of the asset. The U.S. Department of Agriculture uses several different financial metrics to evaluate farm sector liquidity. Cash and cash-convertible assets—"current" assets—are expected to increase $11.9 billion (or 6.6 percent) in 2020 to $192.9 billion, while liabilities due to creditors within 12 months—"current" debt—are expected to increase $7.2 billion (or 7.1 percent) to $109.8 billion in nominal dollars. The current ratio, current assets divided by current debt, is forecast to be constant at 1.76 for both 2019 and 2020. Working capital, the amount of cash and cash-convertible assets minus amounts due to creditors within 12 months, is forecast at $83.0 billion in 2020, a 6-percent increase from 2019.
The debt service ratio measures the share of the sector's value of production required to service farm debt payments and is forecast to drop to 0.25 in 2020. The times interest earned ratio measures the farm sector's ability to meet interest payments out of 2020 net farm income and is forecast to improve significantly, increasing from 5.2 in 2019 to 9.1 in 2020. The improvement in these ratios reflects the expected decline in interest expenses and interest rates in 2020 and the increase in net farm income.
Profitability refers to the sector's ability to generate returns from production inputs. Profitability ratios measure the farm sector's return relative to resources used. In 2020, farm sector profitability forecast measures are projected to improve. Total rate of return on farm assets is expected to increase to 4.1 percent in 2020 from 3.0 in 2019. Total rate of return on farm equity is expected to be 4.1 percent in 2020, up from 2.70 in 2019.
See more about financial ratios in the Documentation for the Farm Sector Financial Ratios.
A Note on Farm Balance Sheet Estimates and Forecasts
The farm sector balance sheet aims to provide a market value estimate and forecast of farm sector assets, debts/other liabilities, and wealth (equity or net worth). It differs from individual business and corporate balance sheet accounts that 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 objective of the farm sector balance sheet is to estimate or forecast the value of assets if sold in today's marketplace.