Errata: On December 12, 2014, the ERS farm income estimates for 2008-2013 and the 2014 forecast, released on November 26, were revised to correct coding and data input sourcing problems in the underlying farm income database. Revisions also incorporate new data that became available following the November 26 release. While changes to individual State level estimates may be larger, at the U.S. level, these corrections and data revisions increased 2013 net farm income by 2 percent, to $129 billion. Also affected were the value of year-end inventories and related measures in the balance sheet, as well as production expenses, total value of production, gross and net value added, the value of inventory change, and their respective crop components in the income statement. Net farm income forecast for 2014 increased 0.4 percent, to $97.3 billion.
The agricultural sector’s balance sheet reports the estimated current market value of farm business sector assets, debts, and equity as of December 31. While the term "balance sheet" is usually applied to individual firm accounts, it is used here to represent sectorwide finances because the data reflect the same accounting relationship: assets - debt = farm equity.
The balance sheet provides information on changes in the farm sector’s economic well-being by tracking the financial performance of the U.S. farm business sector as a whole via a series of "snapshots" taken at the end of each year. Over time, changes in the sector’s financial condition offer insights into the factors driving changes in farm sector well-being. For example, changes in equity (net worth) indicate the extent to which farm business wealth is being generated. Additionally, by considering the balance sheet and farm income statements jointly, financial ratios can be estimated reflecting the sector's solvency (e.g., debt-to-asset ratio), profitability (rate of return on assets), liquidity (e.g., farm business debt service coverage ratio), and efficiency (e.g., asset turnover ratio).
Farm Sector Assets, Debt, and Equity Forecast To Moderate in 2014
The rate of growth in farm assets, debt, and equity is forecast to moderate in 2014 compared to recent years. The slowdown in growth is primarily the result of an expected decline in net farm income relative to 2013, higher borrowing costs, and moderation in the growth of farmland values. As a result, the value of farm assets is expected to rise 3.2 percent in 2014, while farm sector debt is expected to increase 3.1 percent. Over the last 10 years, the compound annual growth in each of these measures has averaged 5.6 and 4.3 percent, respectively. Despite the slowdown, the sector continues to generate wealth, albeit at a slower pace than recent years. See details in the table U.S. farm sector financial indicators, 2010-2014F.
Farm Sector Assets
Historically, farmland values have driven changes in the total value of farm sector assets, due to the large proportion of the sector’s assets held in real estate. Accordingly, the projected rise in farm sector assets in 2014 primarily represents an expected 2.9-percent increase in the value of farm real estate. Growth in farmland values is forecast to slow in 2014 relative to recent years due to reduced farm income expectations, lower crop prices, and higher interest rates. Nonetheless, continued growth in the value of farm real estate reflects expectations of favorable net returns from both the market and government programs, including crop insurance, in 2014 and the future.
The value of crop inventories is expected to rise by 18.3 percent relative to 2013, due to large inventory increases for soybeans and corn. The large rise in crop inventory values reflects expectations that farmers will choose to store more of this year’s production given anticipated above-average yields—including record harvests for soybeans and corn—and lower crop prices. The value of livestock inventories is expected to rise by 16.7 percent, continuing a five-year growth trend. The value of livestock inventories continues to rise due to increases in the per head value of livestock outweighing an expected reduction in cattle, calf, and hog herds. Record high prices for these commodities have led farmers to continue culling their herds, while feed prices—despite easing in 2014—remain high as a result of continued drought conditions. Additionally, throughout 2014 the porcine epidemic virus has put downward pressure on the quantity of hog inventories by both reducing hog litter sizes and increasing piglet mortality.
The value of most other farm sector assets in 2014 is expected to remain similar to 2013. The value of purchased input inventories—which includes pre-purchases of production inputs for use in the future—is forecast to decrease by 2.6 percent in 2014 in response to the expected fall in this year’s net farm income. Additionally, the amount of production inputs invested in winter plantings is expected to be lower this winter due to the ongoing drought in California. The value of financial assets is forecast to increase 2 percent relative to 2013.
The value of machinery and motor vehicles is expected to fall by 2.4 percent in 2014, ending a string of strong annual increases since 2010. The projected decline primarily reflects capital expenditures remaining flat (see table on Gross Capital Expenditures). Overall capital expenditures are expected to decrease slightly as a result of (1) declining revenue, (2) a drop to $25,000 in the amount of capital investment that can be currently deducted for tax purposes, and (3) the expiration of accelerated first-year (“bonus”) depreciation. Even with this year's decrease, the value of machinery and motor vehicle assets will have increased 67 percent over the last decade.
Farm Sector Debt
Real Estate Debt
Farm sector real estate debt is forecast to increase 2.6 percent in 2014, to $182.7 billion. This represents a slight drop in the average growth rate (3.5 percent) observed over the past 5 years. The slower growth is attributable to the expected slowdown in farmland price increases and an expected increase in interest rates relative to 2013.
Land prices have risen sharply over the last several years in principal crop producing regions due to strong demand for crop production; however, land price gains are expected to moderate in 2014 as farm commodity prices and net income, particularly in corn growing regions, retreat from recent levels. Interest rates are also expected to increase slightly in 2014, raising the cost of debt-financed land purchases. However, real estate debt is still expected to grow as both borrowers and lenders continue to view land as a good investment, supporting continued demand for real estate loans and the availability of funds.
Nonreal Estate Debt
Nonreal estate debt is forecast to grow more quickly than real estate debt in 2014, rising 3.7 percent to $135 billion. The change primarily reflects interaction between falling farm incomes and input price levels, while an expected increase in interest rates relative to 2013 plays a smaller role. The forecast drop in farm income creates upward pressure on nonreal estate debt levels by decreasing the cash available to cover operating expenses. Production input costs are expected to rise moderately, increasing operating expenses and heightening the need for debt financing. Correspondingly, lenders report an increase in the demand for short-term debt financing.
Farm Sector Solvency Ratios
In 2014, the farm sector's debt-to-asset and debt-to-equity ratios are forecast to remain essentially flat at 10.7 and 11.9 percent, respectively. Despite the expected slowdown in asset growth, the level of debt relative to assets and equity is at historically (post-1970) low levels, reaffirming the farm sector’s strong financial position. As such, the sector remains well insulated from the risks associated with commodity production (such as adverse weather), changing macroeconomic conditions in the United States and abroad, and any fluctuations in farm asset values that may occur due to changing demand for agricultural assets.
Farm Business Balance Sheet: November 2014 Versus August 2014 Forecasts
The November 2014 forecast reflects several revisions to major components of last August’s farm sector asset and debt forecasts. Compared to August’s outlook, total asset, debt and equity levels are all forecast to grow at a faster rate.
Total farm sector debt is now forecast to rise 3.1 percent in 2014, up from the 2.7 percent forecast in August. This reflects an expected increase in the growth rate of nonreal estate debt more than offsetting a slight decrease in the growth of real estate debt from August’s expectations. The change for real estate debt reflects both an expected slowdown in the growth of farmland values and continued demand for real estate loans. Meanwhile, the increase in nonreal estate debt growth primarily reflects an expectation of greater utilization of operating loans due to the drop in forecast net farm income from August to November.
Due to November’s upward revision in the forecast value of farm assets being larger than the increased forecast in farm debt growth, the November forecasts for 2014 debt-to-asset and debt-to-equity ratios are lower than the August forecasts.
In addition to the forecast changes, farm sector crop and livestock inventory asset values for 2008-12 were revised as sector cash receipt and inventory adjustment data were updated to incorporate NASS final estimate information. The values of farm sector debt, purchased input assets, and machinery/motor vehicles were all revised from 2012 to 2013 to incorporate the Agricultural Resource Management Survey’s updated weights following the census of agriculture. Reflecting these changes, farm sector assets, debt, and equity—and the sector debt-to-asset, debt-to-equity, and equity-asset ratios—were also revised.
Farm Balance Sheet Estimates and Forecasts: Caveats
With the August 2013 release, the farm sector balance sheet underwent a comprehensive review of data sources and estimation methods that have resulted in revisions back to 2002. The breadth and scope of revisions can be gleaned from the Documentation of the Farm Income and Wealth Statistics data product.
Asset values and farm debt outstanding are fundamentally driven by current and expected returns on investments in farmland and other farm capital, and by interest rates. These vary across the country and over time, reflecting differences in expected net returns on crop and livestock portfolios, demand for farmland for nonfarm uses, credit market conditions, and opportunities for nonfarm employment and investments. Future interest rates depend on the strength of the U.S. and world economies, U.S. fiscal and monetary policies, and on other factors subject to change.