Farm Income and Costs: Assets, Debt, and Wealth

Farm Income and Costs Briefing Room 2008 Farm Sector Income Forecast (Forecast will be updated November 25, 2008) 2007 Farm Sector Income Estimates Farm Business Income Assets, Debt, and Wealth Farms Receiving Government Payments

Near-record harvests in 2008, coupled with improved farm product demand and high commodity prices, should result in near-record U.S. farm incomes and increased spending on farm real estate, debt reduction, capital investment, and farm equipment. In 2007, these conditions led to a strengthening of the farm sector balance sheet which should continue in 2008. For the remainder of 2008, commodity prices are expected to remain high and product demand for most commodities is expected to be strong. The demand for farmland and for real estate and nonreal estate loans could moderate by the end of 2008 if declining ethanol profits, increasing production expenses, grain storage shortfalls, and financial market realignments persist.

Farm Asset Values Projected Up Again in 2008

Farm business asset, debt, and equity values are expected to continue rising through the end of 2008. Growth in farm asset and debt values reflects farm investor and lender expectations about the long-term profitability of farm sector investments. The USDA-ERS farm business balance sheet estimates are as of December 31 of each year.

The value of U.S. farm business assets is forecast to increase by about 6.7 percent in 2008 following a 7.9-percent gain in 2007 (see table). The value of farm business real estate assets, which comprise about 85 percent of farm sector assets, is expected to rise by 7.3 percent, following an 8.9-percent gain in 2007. (See glossary for definitions of terms.)

Due primarily to rising commodity prices, the value of year-end 2008 crop inventories is expected to rise sharply (up 21.6 percent from 2007) while the value of livestock and poultry inventories is expected to dip 0.1 percent. The value of machinery and motor vehicles is expected to rise by about 0.9 percent in 2008, based on higher expected sales. The value of purchased inputs held in on-farm inventory is expected to increase by about 4.1 percent in 2008 and the value of financial assets is expected to rise about 4.5 percent.

Farmland Values Continue To Rise in 2008

Farmland and building values (excluding operator and other dwellings and expressed in dollars per acre) of farm businesses rose by 8.9 percent in 2007 and are expected to grow by nearly 7.3 percent in 2008. This solid growth in farm real estate asset values is partly due to rising returns on farm assets and to declines in interest rates. Rising income expectations translate into higher farmland values. In most regions, double-digit gains in cropland values per acre are expected. Gains in ranchland value are driven by demands for recreational and developmental uses, which will continue to exert upward pressure on U.S. farmland values, especially in urban and urbanizing areas.

New housing starts, which dropped off sharply in 2007, are one of the leading indicators for the economy in general. The However, so far the sluggish growth in the U.S. housing sector has not significantly affected the demand for farm real estate assets. Although the number of housing starts has been rising in 2008, the impact of this increase on the demand for real estate, including farm real estate, may not be reflected in 2008 farmland prices.

Farm Debt Increases in 2008

Rising crop values can result in higher potential income and will likely result in increased real estate demand in row crop producing regions. Year-to-year changes in net cash income, land values, and interest rates can each have substantial impact on real estate debt levels.

Nonreal estate agricultural loan demand is driven by investment in machinery, equipment, and seasonal production inputs. Like real estate loan demand, nonreal estate loan demand also depends on recent levels of net cash income from farming and from non-farm sources. With record levels of net cash income in 2007 cash reserves may be available for purchases of nonreal estate items. Like farm net cash income, household income in total has been rising along with net worth, including net worth from non-farm sources. As much as 40 percent of nonreal estate transactions may be on farm operations that do not carry debt, indicating the popularity of cash purchases.

Farm business debt is anticipated to reach $211.7 billion by the end of 2008, up marginally from year-end 2007. Real estate debt is expected to rise to $111.1 billion, up 3.1 percent, while nonreal estate debt should be down 3.0 percent, to $100.6 billion. Thus, farm real estate debt is expected to account for 52.5 percent of total farm debt in 2008.

Expectations that nonreal estate debt will decrease are based on decreased loan demand, projected for two reasons. First, the high level of earnings resulting from record farm income over the past 2 years may enable many producers to self-finance intrayear production expenses. Second, rising input costs for energy, feed, seed, fertilizer, and other inputs--combined with market uncertainties--may be leading some producers to rethink the wisdom of borrowing to expand operations.

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Farm Sector Equity Projected To Reach Nearly $2.1 Trillion in 2008

Farm business equity is expected to continue rising in 2008 as the increase in farm asset values exceeds the rise in farm debt. Sector net worth is expected to reach over $2.1 trillion in 2008, up about $133 billion from 2007. This growing stock of equity capital can help finance investments in farm and nonfarm capital, or may be used to restructure outstanding debt.

Farm Sector Solvency Continues To Improve

Most current borrowers should have little difficulty servicing their production loans, given high commodity prices. Farm sector solvency continues to improve, as measured by the debt-to-equity (D/E) and debt-to-asset (D/A) ratios. The D/E ratio measures the relative proportion of funds invested by the creditor (debt) and owners (equity). The D/A ratio measures debt pledged against farm assets, indicating overall financial risk. With the average debt-to-equity ratio expected to fall from 10.6 percent in 2007 to 9.9 percent in 2008, and the debt-to-asset ratio expected to fall from 9.6 percent ito 9.0 percent, farm business solvency continues to improve. In addition, an increasing number of machinery, seed, and chemical suppliers are offering financing for the farm sector's credit needs. See also: USDA-ERS farm income web site: Financial ratios: liquidity and efficiency; solvency and profitability.

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Unused Debt Repayment Capacity Expected To Increase in 2008

Despite the increase in farm debt expected in 2008, the anticipated decline in interest rates on farm loans, combined with the expected rise in net cash income for farm operators, means that the sector’s maximum feasible farm debt and unused debt repayment capacity are both expected to increase in 2008. Farm operator unused debt repayment capacity is expected to reach its highest dollar level since 1970.

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Debt Repayment Capacity Utilization (DRCU) is the ratio of farm operators’ actual farm debt relative to their maximum feasible farm debt in any given year. DRCU is a measure of the ability of farm operators to repay their 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, or selling farm assets. A decrease in DRCU indicates that a lower proportion of farm operator net cash earnings is needed to repay farm debt. By the end of 2008, farm operator DRCU is expected to decline to about 43.4 percent, down from 48.3 percent in 2007.

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See glossary.

See the official USDA estimates and forecast tables.

See balance sheet history.

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