Today's Farms Better Positioned to Withstand Economic Fallout

Farms now hold more debt, but are better prepared for unexpected financial changes, USDA data finds

Published on: Apr 15, 2014

Despite a 39% increase in the amount of debt held by U.S. farm businesses between 1992 and 2011, U.S. farms are now situated in a stable financial position, thanks to improving income and historically low interest rates, a pair of USDA farm income and ag management surveys say.

USDA’s Farm Costs and Returns Survey and Agricultural Resource Management Survey provided the data for a recent summary of the farm sector's financial situation and outlook, prepared by USDA agricultural economists Kevin Patrick and Jennifer Ifft.

The two economists say that while debt use and leverage varies widely, most farm businesses are better prepared to handle unexpected changes in farm income or interest rates than they were in the 1990s – hopefully poised to avoid any similar situations to the 1980s farm economy fallout.

Farms now hold more debt, but are better prepared for unexpected financial changes, USDA data finds
Farms now hold more debt, but are better prepared for unexpected financial changes, USDA data finds

Debt shift
According to the two surveys, the broad uses for farm business debt remained stable, with about 60% used to purchase farm real estate or secured with a lien on real estate.

The amount of debt, however, increased most for large family farms (those with gross cash farm income greater than $1 million), gaining from 16% in 1992 to 35% in 2011. Over the same period, the share of debt held by small family farms (those with gross cash farm income less than $350,000), declined from 46%of all farm business debt to 27%.

Related: USDA Projects Higher Net Farm Income in Latest Forecast

These shifts largely reflect changes in large and small farm production over this period, Ifft and Patrick suggest. More than 20 years ago, small farms made up 35% of the value of production from farms and large farms contributed 24%. But in 2011, the values were reversed.

"The shift in production toward larger farms not only changed the distribution of farm debt, but may have also contributed to its growth, as larger farms use debt financing more than smaller farms," the economists explain.

Production value from high-debt farms
The economists' summary also examined how highly leveraged farms contribute to the value of production, and what could happen to ag production in the event of a financial downturn.

Broadly, 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, Ifft and Patrick explain.

Using a debt-to-asset ratio greater than 0.4 to indicate a "highly leveraged" farm, the report found that between 1992 and 2011, highly leveraged farms had an average value of production that was consistently more than twice the average for all farm businesses.

Today's Farms Better Positioned to Withstand Economic Fallout

This number, however, has been declining, suggesting the sector’s financial resiliency has increased over time, because events like an unexpected drop in income or a sudden jump in interest rates would likely impact highly leveraged farm businesses more than farms with little or no debt.

"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," Ifft and Patrick conclude.

View the complete USDA ERS report, Farm Businesses Well-Positioned Financially, Despite Rising Debt