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 $0.1 trillion (almost 4 percent) in 2017. Farm sector debt is expected to rise 4.4 percent in 2017, while a 4-percent increase 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
The value of farm real estate assets, which includes the value of land and buildings, accounts for the largest share—forecast to be about 83.2 percent in 2017—of the value of total farm sector assets. ERS anticipates that farm sector real estate market value will continue its upward trend through 2017. Real estate asset value has increased 6.5 percent annually since 2010 and is forecast to increase 4.6 percent in 2017.
The next largest farm asset category is "machinery and vehicles," reflecting the capital intensity of U.S. agriculture. It is forecast to remain relatively stable between 2016 and 2017. Other assets include inventory 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 5.6 percent, reflecting increasing value of livestock, dairy, and poultry during 2017. Crop inventories are forecast to decline 10.8 percent in 2017. Inventories of purchased inputs are predicted to decline 1.9 percent, reflecting small reductions in purchases of both manufactured and farm inputs during 2017.
The smallest component of farm sector asset value is investments and other financial assets, which includes accounts receivable. This category is expected to increase 6.4 percent in 2017, reflecting increased expectations for farm income and cash flows during the year.
The chart below shows inflation-adjusted (real) asset value trends since 1970. Following the 1980s farm financial crisis in the United States, real farm asset values increased gradually after 1992, then at an increasing rate to 2014, declined in 2015 and 2016, and are expected to reach a new all-time high in 2017. Most of this increase over time has been in inflation-adjusted real estate assets, which are expected to achieve a record share of real farm assets (83.2 percent). Inflation-adjusted nonreal estate assets categories peaked in 2012 and are expected to continue their downward trend into 2017. Contributing factors include lower crop prices and the increased cost and more restrictive loan terms associated with obtaining nonreal estate farm loans.
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 remaining balances on debt obligations incurred in previous years.
Farm real estate debt in 2017 is expected to reach an historic high of $242.4 billion. The annual increase ($16.9 billion or 7.5 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. 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.
Farm nonreal estate debt is expected to continue to decline 0.3 percent in 2017. The decline reflects reduced costs for farm inputs and lower crop prices, which reduce demand for new farm machinery and vehicles.
Inflation-adjusted 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 began trending upward in the 1990s. During that span, inflation-adjusted total farm debt peaked in 1981 ($413.4 billion); it is forecast at $390 billion in 2017. Inflation-adjusted real estate debt is forecast to reach its all-time high ($242 billion) in 2017. Inflation-adjusted nonreal estate debt, which peaked at $199.1 billion in 1979, has trended downward since 2014.
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.
Solvency ratios are expected to be stable from 2016 to 2017. Both farm sector debt and assets are predicted to increase relative to 2016. 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. Liquidity ratios have weakened over the past several years. The 2017 forecast current ratio of 1.55 implies that $1.55 of current assets is available to pay for each dollar of current debt. Working capital is forecast at $63.8 billion. The current ratio averaged 2.26 and working capital has averaged $114.4 billion since 2009 and both have trended downward since 2012. The 2017 debt service ratio, which measures the share of production available for debt payments, has averaged 0.23 since 2009 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 since 2009 and, at 4.37, is forecast at its lowest since 2002. The farm sector relies mostly on equity financing.
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.
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.