Farm Sector Assets and Equity Forecast To Fall, Farm Debt To Rise in 2016
Farm assets and equity are both expected to fall in 2016, while farm debt continues to rise. The value of farm assets is expected to decrease by 1.6 percent in 2016. In contrast, farm debt is expected to grow by 2.3 percent. Due to the projected decline in farm sector assets and increase in debt, farm equity is forecast to fall by 2.2 percent.
Sector assets increased rapidly from 2009 to 2015 as low borrowing costs, high commodity prices, and rising farm income created strong demand for farm assets, particularly real estate and vehicles/machinery. However, this trend was interrupted in 2015, and while some categories of farm assets are growing, total farm asset values are expected to drop for a second consecutive year in 2016 as commodity prices and farm income continue to decline.
See a summary of the balance sheet in the table U.S. farm sector financial indicators, 2011-2016F, or get the full balance sheet details.
Farm Sector Assets
Historically, farm real estate values have driven changes in the total value of farm sector assets; in recent years, over four-fifths of the sector’s asset values were held in real estate, including land and buildings. Accordingly, the expected $28.8-billion (1.2 percent) decline in the value of farm real estate drives the projected decline in farm sector asset values in 2016. Farm real estate values have increased rapidly in recent years as high crop prices and low interest rates led to strong demand for farmland and buildings. With a third straight year of lower commodity prices and income forecast in 2016, farm real estate values are expected to decline modestly. The decline in real estate asset value also reflects a small forecast decline in the amount of land in farms.
Most other farm assets—investments and other financial assets, and inventories—are also expected to decline in 2016. The value of purchased input inventories—which includes pre-purchase of production inputs for future use—is forecast to fall 1.8 percent in 2016. This decrease is consistent with declining farm income and lower expected expenditures on production items. With a third year of lower income forecast for 2016, farmers may use their financial assets to pay down debt of the farm operation or otherwise adjusting their asset portfolio, as well as to fund household consumption.
The value of crop and livestock inventories are both expected to fall in 2016, reflecting both a change in quantity as well as a reduction in value of the remaining inventory. Crop inventories are expected to decline $7.3 billion in 2016 due to inventory drawdown as well as lower expected prices for inventory crops also reduce the value of remaining inventory. Overall, crop inventories are expected to decline by 15.4-percent to $40.2 billion. The value of animal/animal product inventories is likewise forecast to fall by 4.2 percent, to $118.5 billion as an expected decline in per-head values more than offsets an expected increase in the quantity of animal/animal product inventories.
In contrast to the other farm asset classes, vehicle and machinery assets—the second largest class—are forecast to increase 0.7 percent in 2016 after slight declines in value over the past 2 years. A predicted drop in the price of farm vehicles and machinery is expected to reduce the value of the sector’s existing machinery and vehicles stock, while capital expenditures on new machinery and vehicles are expected to outpace capital consumption for these items.
Farm Sector Debt
Farm sector real estate debt is forecast to increase 1.1 percent in nominal terms in 2016 (a 0.9-percent decrease in inflation-adjusted terms as shown in the figure below), to $207.3 billion ($185.1 billion in inflation-adjusted terms). Although 2016 end-of-year farm real estate values are forecast to decline slightly at the sector level, interest rates have remained accommodating and agricultural lenders—particularly commercial banks and the farm credit system— have reported growth in farm real estate loan volumes throughout 2015, suggesting that credit to the sector has not been curtailed up to now.
Nonreal estate debt is forecast to continue growing more quickly than real estate debt in 2016, rising 3.8 percent to $165.2 ($147.5 billion in inflation-adjusted terms). Farm income is forecast to drop for a third consecutive year, reducing the amount of cash available to cover expenses. Farmers have historically borrowed against their equity in periods of declining farm income, and lender reports suggest the demand for nonreal estate debt financing increased throughout 2015; the sector forecast assumes this level of demand will continue through 2016.
Farm Sector Solvency Ratios
As a result of the decline in farm assets and continued increase in farm debt, the sector’s debt-to-asset and debt-to-equity ratios are forecast to rise to 13.23 and 15.25 percent, respectively, in 2016. The increase suggests a higher amount of financial stress is building in the sector relative to recent years. However, even though these measures of sector leverage have increased every year since 2012, each remains low relative to historical levels. As such, the sector appears to remain well insulated from the solvency risk associated with declining commodity prices, adverse weather, changing macroeconomic conditions, and the fluctuations in farm asset values. See more about financial ratios in the Documentation for the Farm Sector Financial Ratios.
Farm Business Balance Sheet: February 2016 Versus November 2015 Forecasts
Compared to the November 2015 forecast, the February 2016 forecasts for 2015 total assets and debt have decreased, while the equity forecast has increased. Taken as a whole, the value of farm real estate, machinery and vehicles, and investments and other financial assets are now expected to decline slightly less than in November. The change primarily reflects slightly higher cash income projections for 2015, relative to the November forecast. In contrast, crop and livestock inventories are expected to be lower than what was forecast in November 2015, due to lowered crop price and per-head animal price expectations. The 2015 forecast for growth in sector debt has been revised downward to account for the slightly higher forecast level of cash income, and available data suggesting a continued, but slower, growth in real estate borrowing. Additionally, 2015 nonreal estate debt levels have been revised marginally lower, primarily reflecting the slightly higher cash income forecast relative to November. As a result of the forecast level of farm sector debt being revised down by a larger amount than farm sector assets, sector equity has been revised upward, and the farm sector solvency ratios (equity-to-asset, debt-to-asset, and debt-to-equity) are all projected to improve relative to the November forecast.
Farm Balance Sheet Estimates and Forecasts: Caveats
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 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., debt service ratio), and efficiency (e.g., asset turnover ratio).
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.