Assets, Debt, and Wealth
Farm Sector Equity Forecast To Rise in 2017
Farm sector equity—the difference between farm sector total assets and total debt—is predicted to rise $70.1 billion (2.7 percent) in 2017 to $2.65 trillion. Farm sector debt is expected to rise $11.0 billion (2.9 percent) to $385.2 billion, while an $81.1-billion (2.7 percent) increase to $3.0 trillion is anticipated in the market value of farm sector assets.
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
At $2.5 trillion, the value of farm real estate assets, which includes the value of farm land and buildings, accounts for the largest share (83.1 percent) of the 2017 total value of farm sector assets. ERS anticipates that farm sector real estate market value will increase 3.3 percent in 2017, continuing its upward trend.
Nonreal estate assets are forecast to decline slightly (0.1 percent, in nominal terms) in 2017 to $512.8 billion. The largest farm nonreal estate asset category is "machinery and vehicles," reflecting the capital intensity of U.S. agriculture. That category is forecast to decline $5.3 billion (2.1 percent) to $250.2 billion in 2017. Other nonreal estate asset categories include inventories such as animals/animal products, crops, and purchased inputs that have not yet been sold or used. End-of-year stocks for animals/animal products are expected to increase 6.0 percent to $115.5 billion, reflecting increasing value of livestock, dairy, and poultry during 2017. The value of crop inventories is forecast to decline 6.3 percent in 2017 to $52.1 billion. Inventories of purchased inputs are predicted to decline 0.8 percent, reflecting small reductions in purchases of both manufactured and farm inputs during 2017.
The smallest component of farm sector nonreal estate assets is investments (in cooperatives) and other financial assets, which includes net accounts receivable (accounts receivable less accounts payable). This category is expected to increase 2.7 percent in 2017 to $80.2 billion, reflecting increased expectations for farm income and cash flows during the year.
The chart below shows inflation-adjusted (real) farm asset values since 1970. Following the decline in farm asset values during the 1980s U.S. farm financial crisis, asset values averaged 1.5 percent in inflation-adjusted growth from 1991 through 2003, 9.7 percent in inflation-adjusted growth from 2004 to 2006, and 2.9 percent from 2007 to 2016. Inflation-adjusted farm asset values are expected to increase 0.9 percent in 2017. Most of the increase in asset values over time has been in the inflation-adjusted value of real estate assets. Inflation-adjusted nonreal estate asset values over the same span grew 0.7 percent (1991-2003), 3.5 percent (2004-06), and 2.0 percent (2007-16). However, the value of nonreal estate assets is expected to decline almost 2 percent (inflation-adjusted) in 2017, reflecting lower crop prices and the increased cost (and more restrictive loan terms) associated with obtaining nonreal estate farm loans in 2017.
Farm Sector Debt
Farm debt is composed of outstanding real estate and nonreal estate debt. Real estate debt includes debt to finance land and buildings, as well as debt for the purpose of nonreal estate purchases secured by farm real estate. 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 remaining balances on debt obligations incurred in previous years.
Farm real estate debt in 2017 is expected to reach an historic, nominal high of $236.4 billion. The annual increase ($10.4 billion or 4.6 percent) expected in real estate mortgage loans reflects continued expected demand for cropland combined with anticipated low interest rates, strong balance sheets, and strong crop yields. Also contributing to the increase in farm real estate debt is increasing use of real estate as collateral to secure nonreal estate borrowing; lenders will often require this of farmers and ranchers during times of increasing risk. Farm nonreal estate debt is expected to remain relatively flat (a 0.4 percent increase) in 2017.
Farm debt rose rapidly in the 1970s, peaked in the early 1980s during the high-interest-rate farm financial crisis, declined as the farm sector reduced its reliance on debt financing, and resumed trending upward in the 1990s. During that span, inflation-adjusted total farm debt peaked in 1981 ($413.4 billion in 2017 dollars); it is forecast at $385.2 billion in 2017. Inflation-adjusted real estate debt is forecast to reach an all-time high ($236.4 billion) in 2017. Inflation-adjusted nonreal estate debt, which peaked in 1979 at $199.1 billion (in 2017 dollars), has trended downward since 2014.
Farm Sector Solvency and Liquidity Ratios
ERS calculates multiple ratios as 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 measures —such as the current ratio, working capital, 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.
The farm sector debt-to-asset ratio and debt-to-equity ratios are expected to move slightly upward, and the equity-to-asset ratio is expected to decline slightly in 2017. Liquidity ratios have weakened over the past several years. Working capital, which is the difference between current assets and current liabilities, is forecast at $65.3 billion in 2017, after averaging $114.4 billion from 2009 to 2016. The "current ratio," which is current assets divided by current debt and is another measure of liquidity, averaged 2.26 during 2009-16. However, it too is forecast down to 1.57 in 2017, after trending downward since 2012.
Current assets are those that are expected to be used up by the farm sector by the end of 2018; examples include cash or inventory. 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. The higher the current ratio, the greater the assurance that current liabilities can be repaid within the year. About $114 billion (30 percent) of farm sector debt is expected to be "current" in 2017 while $179 billion (almost 6 percent) of farm assets are classified as current.
The 2017 debt service ratio, which measures the share of production required to service farm debt payments, averaged 0.23 from 2009 to 2016 and, at 0.27 in 2017, is forecast at its highest since 2002. The times interest earned ratio, which measures the farm sector’s ability to meet interest payments out of current net farm income, has averaged 6.89 from 2009-2016 and, at 4.37, is forecast at its lowest since 2002.
See more about financial ratios in the Documentation for the Farm Sector Financial Ratios.
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, debts/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.