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Image: Farm Economy

Assets, Debt, and Wealth

The balance sheet of the agricultural sector reports the estimated current market value of farm business sector assets, debts, and equity as of December 31. Despite representing the sector rather than individual firms, the term "balance sheet" is used because the data reflect the same accounting relationship: assets – debt = farm equity.

Farmers and ranchers, agribusinesses, farm lenders, program administrators, policy analysts, and others often need information on the farm sector’s economic well-being. The balance sheet of the agricultural sector provides this information by tracking changes in the financial performance and well-being of the U.S. farm business sector as a whole via a series of "snapshots" of the sector’s financial condition, and offering insights into the factors driving changes. 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 Increase More Slowly in 2014

The rate of growth in farm assets, debt, and equity is forecast to slow in 2014 compared to recent years. The slowdown in growth is a result of expected lower net income, higher borrowing costs, and moderation in the growth of farmland values. As a result, the value of farm assets is expected to rise 2.4 percent in 2014, while farm sector debt is expected to increase 2.3 percent. The annual growth in each of these measures had averaged 5.8 and 4.3 percent, respectively, over the last 10 years. Despite the slowdown, the sector continues to generate wealth as farm equity is expected to increase by 2.4 percent in 2014. See details in the table of U.S. farm sector financial indicators, 2010-2014F. Excel icon (16x16)

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. While the growth in farmland values is forecast to slow relative to recent years due to lower income, lower prices, and higher interest rates, farmland values are expected to continue rising. This reflects the continued relative strength of commodity prices, interest rates that are still accommodating, and the expectation of continued favorable net returns from both the market and government programs, including crop insurance.

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In contrast to real estate, the combined value of most other farm sector assets in 2014 is expected to remain similar to 2013. The value of crop inventories is expected to rise by over 11 percent relative to their projected level at the end of 2013, due to large inventory increases for corn and soybeans. The value of livestock inventories is expected to rise by 1.2 percent, reversing recent declines. The value of purchased input inventories assets is forecast to decrease by 2.6 percent in 2014, as lower input prices—particularly for feed, fertilizer, and agricultural chemicals—outweigh expected production increases. 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 an expected decrease in capital expenditures (see table on Gross Capital Expenditures). Capital expenditures are expected to decrease as a result of declining revenue, a drop to $25,000 in the amount of capital investment that can be currently deducted for tax purposes, and the expiration of accelerated first-year (“bonus”) depreciation. Even with the decrease, the value of machinery and motor vehicle assets will have increased nearly 85 percent over the last decade.

Farm Sector Debt

Real Estate Debt

Farm sector real estate debt is forecast to increase 3.2 percent in 2014, to $186.7 billion. This represents a slight drop in the average growth rate (3.9 percent) observed over the past 5 years. The somewhat slower growth in farm real estate debt is primarily attributable to the expected slowdown in farmland price increases, as well as lower net cash income, reduced government payments, 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 of the country 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 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, as evidenced by continued demand for real estate loans and the availability of funds.

Nonreal Estate Debt

Nonreal estate debt is forecast to grow more slowly than real estate debt in 2014, rising 1 percent to $129.5 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.  An expected drop in farm income creates upward pressure on nonreal estate debt levels by decreasing the cash available to cover operating expenses. On the other hand, the expected fall in the cost of production inputs—particularly feed, fertilizer, and agricultural chemicals—lowers operating expenses, all else equal, reducing the need for debt financing.

Over the past decade the amount of operating capital needed for most farming enterprises has risen dramatically. Much of the rise is attributable to growth in the general price level, which has led a continued increase in input prices. However, input prices began to moderate in 2013 as fertilizer prices fell and chemical price increases slowed. In addition, lower crop prices have reduced the cost of feed for livestock producers. The price level of production inputs is forecast to continue decreasing in 2014, helping to ameliorate the potential upward pressure placed on debt levels from falling income. See data presented in the Production expenses by category, U.S. and State report for more details.

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Farm Sector Solvency Ratios

In 2014, the farm sector's debt-to-asset and debt-to-equity ratios are forecast to continue a pattern of decline observed over the past 5 years, falling to 10.54 and 11.78 percent, respectively. These decreases would result in the lowest value for both measures since 1954. The historically low levels of debt relative to assets and equity reaffirms the sector’s strong financial position despite the expected slowdown in asset growth. As such, the sector is better insulated from the risks associated with commodity production (such as adverse weather), changing macroeconomic conditions in the United States and abroad, as well as any fluctuations in farm asset values that may occur due to changing demand for agricultural assets.

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Farm Business Balance Sheet: February 2014 Versus November 2013 Forecasts

The February 2014 release includes several revisions to major components of the farm sector asset and debt forecasts since November. Compared to November, total asset, debt, and equity levels for 2013 are all forecast to grow less quickly. The level of total farm sector assets is now predicted to increase 4.2 percent in 2013, as opposed to November’s forecast of 7 percent. As a result, farm sector assets are expected to be about $78 billion lower in 2013 than forecast in November.

The majority of the change in the sectorwide total asset forecast from November to February is attributable to the decrease in expected real estate asset values. As of February, the value of farm real estate assets in 2013 is forecast to be $2.4 trillion, down $78 billion from the November forecast. This reflects a slowdown in farmland price growth due to lower returns to farming/falling commodity prices. Other asset value forecasts remain little changed from November.

The percentage increase in total farm sector debt forecast for 2013 is also lower, falling from 3.3 percent in November to 2.9 percent in February. This decrease is primarily driven by a drop in the forecast for nonreal estate debt, which fell $1.8 billion from November’s forecast due to higher expected cash income and lower expected operating expenses as a result of moderating input prices.  In contrast, February’s forecast revised the growth rate in year-end 2013 real estate debt upward to 4.6 percent from 4.2 percent in November. This change reflects lenders’ continued reports of ample funds availability and strong demand for real estate loans, even though the growth in farmland prices has slowed.

Driven by the changes in expected asset and debt levels, the farm equity forecast for 2013 fell from a projected increase of 7.4 percent in November to 4.4 percent in February. Because the percentage decrease in 2013’s asset value outpaced changes to forecast debt levels, the forecast for 2013 debt-to-asset and debt-to-equity ratios rose slightly from November to February.

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.



Last updated: Tuesday, February 11, 2014

For more information contact: Mitch Morehart

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