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Farm Debt-to-Asset Ratios Lowest in 20 Years -- ERS
Farm debt has increased a lot over the last two decades. Bad news, right? At the same time, general farm income has grown by even more, resulting in lower average debt-to-asset ratios and fewer farmers leveraged to what's considered high, according to a report released by the USDA Economic Research Service (ERS) earlier this month.
The total debt held by U.S. farms grew by just shy of 40% between 1992 and 2011, according to the report. During that time, the debt-to-asset ratio's gone from 0.13 in 1992, up to 0.15 in 1997 then back to 0.09 in 2011. The numbers are based on a survey of around 900,000 farms from $350,000 in annual gross cash income and up "operated as farm businesses based on their size, organizational structure, or the occupation of their principal operator," according to a report from ERS ag economist Jennifer Ifft.
It's a sign of the buoyancy of farm income levels up to and through 2011, a dynamic further shown by the structure of that debt and its consistency over the 20-year period.
"The broad uses for farm business debt remained remarkably stable, with the majority (roughly 60%) used to purchase farm real estate or secured with a lien on real estate. The remainder was short-term debt (lasting less than one year) and medium-term debt (lasting more than one year) used to purchase farm inputs (such as seed, fertilizer, fuel, and labor) and equipment," according to Ifft's report.
Large farms -- those with gross annual cash income over $1 million -- shoulder the highest debt-to-asset ratios, with large dairy farms carrying the highest on average, about 0.26. Small-scale beef cattle operations have the lowest, just below 0.05.
Age is a major component of the decline in overall farm debt, but age likely has more to do with that than the farm sector's strong general economic health.
"Between 1992 and 2011, the share of farm business principal operators under 45 years old declined from 30% to 13%. Over the same period, the share of principal operators 55 years or older increased from 48% to 68%. Young operators can use debt to expand their farm operation, adopt new technologies, and improve competitiveness and profitability. Older operators are more likely to have paid off farm debts and are less likely to take on new debt as they approach retirement," according to Ifft's report. "In addition, older farmers tend to own more of the land they operate, so appreciating farmland values have had a greater impact on the value of their assets relative to those of younger farmers who often rent more of the land they operate. As fewer young operators enter farming, and older farm operators remain active past retirement age, the need for additional debt and the debt-to-asset ratio of the typical farm business tends to decline."
The number of farmers leveraged past a debt-to-asset ratio of 0.40 is at a fairly low level now. Looking ahead, Ifft's report shows that's likely to change. Again, not because of general economic stability or lack thereof, but rather because of demographic changes. With the likelihood that a growing number of older farmers will begin retiring, that leaves younger farmers -- who by nature have to take on more debt to operate and grow their farms -- with a growing piece of the farm economy pie. That means the next ERS report like this latest one chronicling conditions between 1992 and 2011 will probably show an increase in debt-to-asset ratios. But that won't be all bad, Ifft says.
"The share of highly leveraged farm businesses and their contribution to the total value of production indicate the vulnerability of the farm sector to debt-induced disruptions in production. Declines in the share of the value of production attributed to highly leveraged farm businesses have largely been proportionate to the declines in the number of farm businesses with high leverage. Between 1992 and 2011, farm businesses with a debt-to-asset ratio greater than 0.4 had an average value of production that was consistently more than twice the average for all farm businesses," she says. "In 2011, 5.3% of farm businesses had a debt-to-asset ratio greater than 0.4 and contributed 13.4% of farm businesses’ total value of production; by comparison, in 1992, 9.5% of farm businesses, responsible for 19.6% of production, were highly leveraged. The declining role of highly leveraged farms suggests the sector’s financial resiliency has increased over time because financial shocks -- such as an unexpected drop in income or a sudden jump in interest rates -- would likely affect the viability of highly leveraged farm businesses to a greater degree than farms with little or no debt."