Farm Income and Costs: Assets, Debt, and Wealth

Overview 2012 Farm Sector Income Forecast (Updated 2/13/2012) 2011 Farm Sector Income Forecast (Updated 2/13/2012) 2010 Farm Sector Income Estimates (Updated 8/30/2011) Farm Business Income (Updated 2/13/2012) Assets, Debt, and Wealth (Updated 2/13/2012) Farms Receiving Government Payments Data Sources Recommended Readings Recommended Data Glossary

Farm Sector Assets, Debt, and Equity Forecast To Increase in 2012

The farm sector balance sheet estimates for 2012 reflect higher cash receipts for crops (0.7 percent) but lower cash receipts for livestock (-0.1 percent), higher production expenses (3.9 percent), and lower returns to operators (-6.5 percent) relative to 2011. The three most important factors driving higher asset values (including farm real estate) continue to be relatively high expected income from production assets, favorable borrowing costs, and expected growth of future returns on these investments. Farm asset values are expected to rise from $2.34 trillion in 2011 to $2.47 trillion in 2012 (up 5.7 percent). Farm business debt is expected to increase from $244.8 billion in 2011 to $254.1 billion in 2012. Resulting farm equity is expected to increase from $2.10 trillion in 2011 to $2.22 trillion in 2012. The debt-to-asset and debt-to-equity ratios are expected to decline, indicating that the farm sector as a whole is forecast to be more solvent than it was in 2011 (see table).

Farm Business Assets

Farm sector assets are expected to rise by 5.7 percent in 2012, due mainly to a projected 5.9-percent increase in the value of farm real estate. Other asset categories expected to increase in 2012 include machinery and equipment values (up 4.3 percent), the value of crop inventories (up 17.1 percent), purchased inputs (up 2.8 percent), and financial assets (up 5.7 percent). The value of livestock and poultry inventories is forecast to decline by 0.8 percent. Farmland values should continue to rise given the strength of commodity prices, accommodating interest rates, expectations of continued favorable net returns both from the market and from government programs, and growth in agricultural exports.

In 2011, the value per acre of farmland and farm buildings in the U.S. is estimated to have risen by 5.9 percent, based on estimates of farmland and building values as reported in Land Values: 2011 Summary, USDA-NASS, August 4, 2011. However, average values per acre vary considerably by State. This reflects the wide variation in expected income from production assets, borrowing costs, and expected growth of future returns—both farm and nonfarm— across the United States.

In 2012, the value per acre of farmland and farm buildings in the U.S. (preliminary) is forecast to rise another 5.9 percent. This estimate is developed using historical time-series data and reports on farmland market trends from sources across the country. The forecast model uses a variety of data, including: estimates of farmland and building values as reported by NASS, interest rates, returns per acre, exchange rates, and other input data to generate out-year forecasts of land and building value per acre. Forecasts from alternative model specifications are evaluated and compared with those from other sources, including individual State land-grant universities and Federal Reserve district banks.

Farm Business Debt

Farm sector debt is forecast to be $254.1 billion by the end of 2012, an increase of 3.8 percent over preliminary estimates of 2011 farm sector debt. Real estate debt accounted for the bulk of the difference and is estimated to be $139.4 billion by the end of 2012, up 5.4 percent, while non-real estate debt is expected to be $114.7 in 2012, up 1.9 percent.

Stable economic conditions support credit availability for creditworthy borrowers, but this outlook is subject to a variety of factors influencing credit markets. Stock market fluctuations resulting from international monetary conditions could cause swings in asset values, interest rate spikes, and export market changes over which individual agricultural borrowers and lenders have no control. Meanwhile, less qualified borrowers could face constraints accessing credit or higher interest rates relative to those paid by fully qualified borrowers. Factors that affect the profitability and risk of both farm lenders and borrowers can affect agricultural lending markets in a variety of ways. For example, the need to maintain adequate profits can lead banks to adjust the spread between the interest rate that they pay to acquire funds and the interest rates they charge on their agricultural loans. At the same time, creditworthiness of agricultural borrowers is subject to a changing business environment. Banks monitor collateral requirements and change loan terms as agricultural loan quality changes.

Non-Real Estate Debt

Non-real estate debt for 2012 is forecast to increase marginally to $114.7 billion from the 2011 level. The main component in the non-real estate model is working capital (current assets less current liabilities). The value of current assets is notably high, especially for crop farmers, due to their inventory holdings of production assets, especially feed and seed, which have increased in value as prices have risen. With higher working capital and continuing low interest rates, some borrowers can self-finance their input and equipment purchases while other borrowers feel assured that favorable farm incomes will continue, which will enhance their future repayment ability. For livestock producers, higher feed costs are expected to increase average loan size, as their net cash income has not been as high in recent years as it has been for crop producers.

Recent Agricultural Resource Management Survey (ARMS) data indicate that the debt maturities of newly acquired non-real estate loans are trending toward the middle of the maturity distribution, with smaller percentages of loans having shorter or longer maturities than in earlier years. This may reflect conflicting preferences among lenders and borrowers. On one hand, lenders may prefer not to extend long-term loan commitments when future interest rates are uncertain. At the same time, farm operators prefer to lock in low interest rates for the longest term possible to minimize costs. Amid historically low interest rates, agricultural lenders are almost certainly pushing more variable-rate loans and loans with shorter maturities.

Real Estate Debt

Farm real estate debt is forecast to be $139.4 billion for 2012, up 5.4 percent from the preliminary 2011 estimate. If the 2012 forecasts are accurate, farm real estate debt will have increased by 3.5 percent since 2008 while land values will have increased 23.5 percent.

Three main factors will affect agricultural sector real estate debt markets for the remainder of 2012: farmland values, sector net cash income, and farm real estate loan interest rates. As land values continue to rise, the effect on real estate debt depends on the profits that can be made from the land at prevailing interest rates. Farm operators appear willing to pay up to maximum values for land based on expected profits accruing from the land’s best use. Limited availability of prime farmland available for sale in many areas of the country increases competition for available farmland. Interest rates are expected to remain low throughout 2012 and funds should continue to be available for well-qualified borrowers. At current levels of commodity prices, expected net cash income will remain at or near record levels, providing good prospects for debt repayment and possibilities for self-financing. Beyond that, high levels of cash reserves should dampen increases in farm real estate debt.

Anecdotal evidence suggests that 15-20 percent of the collateral used for agricultural operating loans is provided by farm real estate, and this likely provides risk coverage for larger operating loans.

Farm Sector Equity (Net Worth)

The value of the farm sector's equity (net worth) is forecast to rise from $2.10 trillion in 2011 to $2.22 trillion in 2012. The estimated increase in farm sector equity is largely due to an estimated 5.9-percent increase in the value of farm real estate.

Farm Sector Solvency Ratios

The farm sector's debt-to-asset ratio is expected to decline from 10.5 percent in 2011 to 10.3 percent in 2012, and the debt-to-equity ratio is expected to decline from 11.7 percent in 2011 to 11.4 percent in 2012. These declines indicate that the farm sector's overall solvency position is strong.

Farm Balance Sheet Estimates and Forecasts: Caveats

Factors Affecting Farmland and Farm Asset Values Vary Across the Country

Asset values and farm debt outstanding are fundamentally driven by current and expected returns (both farm and nonfarm) on investments in farmland and other farm capital, and by interest rates. These factors vary across the country, reflecting differences in expected net returns on crop and livestock portfolios, demand for farmland for nonfarm uses, credit market conditions, and opportunities for non-farm employment and investments.

Current farmland values are driven not only by current returns and borrowing costs but also by investors' expectations about future returns. These expectations are affected by market factors (including expected commodity and input prices), the U.S. economy's growth rate, world supply and demand factors, the dollar exchange rate, inflation, and government farm policies (including government price support payments, crop insurance and farm credit programs, and the ethanol mandate). Unexpected changes in any of these factors can change investor expectations, which in turn can affect the current value of farm assets.

Credit Conditions in Farming Regions and in the Macro Economy Are Dynamic

Farm asset prices are driven not only by current and expected future returns from agricultural production, but also by interest rates on farm loans. Going forward, future interest rates on farm investments will depend on the strength of the U.S. macro economy, the Federal Government's monetary and credit policies, and on the extent to which market interest rates reflect the full opportunity costs of capital, including inflation and other risk premiums.

Interest Rates Going Forward

Interest rates closely link U.S. agriculture to national financial markets in various ways. First, interest rates affect the value of outstanding debt and thus the solvency of the sector. Second, agriculture is particularly sensitive to interest rates because it is one of the most capital-intensive industries in the economy. Interest rates can influence variable production costs by raising or lowering the payments required for shortrun planting-to-harvest borrowing. They also affect the cost of long-term capital investments. Third, interest rates are a key determinant of land values, the base of wealth in agriculture.

Based in part on the activities of the Federal Reserve in the latter part of 2010, interest rates in the overall economy are low and are expected to remain so through the remainder of 2012. Interest rates going forward will be affected by supply and demand forces in domestic and global financial markets.

d

d

d

Unused Debt Repayment Capacity Expected To Decrease in 2012

Debt repayment capacity utilization (DRCU) is the ratio of actual farm debt outstanding relative to the maximum feasible farm debt supportable out of farm income in any given year. DRCU is a measure of the ability of the farm sector to repay farm debt over time solely through the production and sale of farm products and services. A DRCU estimate exceeding 100 percent indicates that debt payments must be made by drawing on additional cash sources, such as taking on additional debt, earning off-farm income, drawing down household assets, or selling farm business assets.

Two factors are contributing to a significant rise in the DRCU ratio in 2012. Farm sector debt is estimated to increase from $244.8 billion in 2011 to $254.1 billion in 2012 and the sector is expected to experience a decrease in net cash income compared to last year's increase. Together, these factors should decrease the sector's maximum feasible farm debt and unused debt repayment capacity in 2012.

In 2012, farm sector DRCU is expected to increase to about 47 percent in 2012. An increase in DRCU indicates that a larger portion of net cash earnings is needed to repay farm debt.

If DRCU increases, that leaves less farm income available for business investments, including capital purchases, capital replacement, alternative investments, debt reduction, or self-financed production expenditures. At the sector level, the decision on which of these investment options to pursue, if any, depends on relative costs and returns. For individual farmers, management preferences and risk tolerance also come into play.

d

See glossary.

See the official USDA estimates and forecast tables.

See balance sheet history.