Farm Income And Wealth: Trends in Financial Stress

USDA 2019 Agricultural Outlook ForumFebruary 21, 2019

Greg LyonsEconomic Research Service, USDA

The Findings and Conclusions in This Preliminary Presentation Have Not Been Formally Disseminated by the U.S. Department of Agriculture and Should Not Be Construed to Represent Any Agency Determination or Policy. This research was supported by the

intramural research program of the U.S. Department of Agriculture, Economic Research Service.

2

Summary

Lower farm incomes, a weaker market for farmland and an uptick in interest rates have raised questions about farm operators’ financial stress

• Are operators earning enough income to service their debt?

• Do operators have the savings and liquid assets on hand to meet their short-term obligations?

• Are more operators at risk of becoming insolvent?

3

Farm sector profits expected to decline in 2018

0

20

40

60

80

100

120

140

160

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018F

$ Bi

llion

s (20

18)

F= Forecast. Values are inflation adjusted using the Chain-type GDP deflator, 2018=100. Source: USDA, Economic Research Service, Farm Income and Wealth StatisticsData as of November 30, 2018

2000 - 2017 NCFI average

Net cash farm income

Net farm income

2000 - 2017 NFI average

4

Are operators earning enough income to service their debt?

0

2

4

6

8

10

12

2000 2002 2004 2006 2008 2010 2012 2014 2016

Term

Deb

t Cov

erag

e Ra

tio

2000 - 2017 TDCR average

𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝐷𝐷𝑇𝑇𝐷𝐷𝐷𝐷 𝐶𝐶𝐶𝐶𝐶𝐶𝑇𝑇𝑇𝑇𝐶𝐶𝐶𝐶𝑇𝑇 𝑅𝑅𝐶𝐶𝐷𝐷𝑅𝑅𝐶𝐶 =𝑁𝑁𝑇𝑇𝐷𝐷 𝑂𝑂𝑂𝑂𝑇𝑇𝑇𝑇𝐶𝐶𝐷𝐷𝑅𝑅𝑂𝑂𝐶𝐶 𝐼𝐼𝑂𝑂𝐼𝐼𝐶𝐶𝑇𝑇𝑇𝑇𝐼𝐼𝑂𝑂𝐷𝐷𝑇𝑇𝑇𝑇𝑇𝑇𝐼𝐼𝐷𝐷 + 𝑃𝑃𝑇𝑇𝑅𝑅𝑂𝑂𝐼𝐼𝑅𝑅𝑂𝑂𝐶𝐶𝑃𝑃

SOURCE: Economic Research Service, using USDA data from ERS and NASS, Agricultural Resource Management Survey, 2000 - 2017

5

The share of larger farms whose debt payments exceed their income has risen

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

2000 2002 2004 2006 2008 2010 2012 2014 2016

Perc

ent w

ith T

DCR

< 1

Less than $100,000 GCFI $100,000 - $500,000 GCFI Greater than $500,000 GCFI

SOURCE: Economic Research Service, using USDA data from ERS and NASS, Agricultural Resource Management Survey, 2000 – 2017. Gross cash farm income is adjusted using PPI for farm products, 2018 = 100.

6

Do operators have the savings and liquid assets on hand to meet their short-term obligations?

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

0

50

100

150

200

250

300

350

2000 2002 2004 2006 2008 2010 2012 2014 2016

Curr

ent R

atio

$ Bi

llion

s (20

18)

Current Assets Current Liabilities Current Ratio

SOURCE: Economic Research Service, using USDA data from ERS and NASS, Agricultural Resource Management Survey, 2000 – 2017. Values are inflation adjusted using the Chain-type GDP deflator, 2018=100.

𝐶𝐶𝐶𝐶𝑇𝑇𝑇𝑇𝑇𝑇𝑂𝑂𝐷𝐷 𝑅𝑅𝐶𝐶𝐷𝐷𝑅𝑅𝐶𝐶 =𝐶𝐶𝐶𝐶𝑇𝑇𝑇𝑇𝑇𝑇𝑂𝑂𝐷𝐷 𝐴𝐴𝐼𝐼𝐼𝐼𝑇𝑇𝐷𝐷𝐼𝐼

𝐶𝐶𝐶𝐶𝑇𝑇𝑇𝑇𝑇𝑇𝑂𝑂𝐷𝐷 𝐿𝐿𝑅𝑅𝐶𝐶𝐷𝐷𝑅𝑅𝑃𝑃𝑅𝑅𝐷𝐷𝑇𝑇𝐼𝐼

7

Liquid assets have returned to average

0

20

40

60

80

100

120

140

160

180

2000 2002 2004 2006 2008 2010 2012 2014 2016

$ Bi

llion

s (20

18)

Crop inventories Livestock inventories Financial assets and net accounts receivableSOURCE: Economic Research Service, using USDA data from ERS and NASS, Agricultural Resource Management Survey, 2000 – 2017. Values are inflation adjusted using the Chain-type GDP deflator, 2018=100.

8

Short term liabilities have largely increased

0

10

20

30

40

50

60

2000 2002 2004 2006 2008 2010 2012 2014 2016

$ Bi

llion

s (20

18)

Accrued interest Current portion of term debt Short term debt

SOURCE: Economic Research Service, using USDA data from ERS and NASS, Agricultural Resource Management Survey, 2000 – 2017. Values are inflation adjusted using the Chain-type GDP deflator, 2018=100.

9

The share of farmers who do not have enough liquid assets to cover their current obligations has increased

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

2000 2002 2004 2006 2008 2010 2012 2014 2016

Perc

ent w

ith C

urre

nt R

atio

< 1

Less than $100,000 GCFI $100,000 - $500,000 GCFI Greater than $500,000 GCFI

SOURCE: Economic Research Service, using USDA data from ERS and NASS, Agricultural Resource Management Survey, 2000 - 2017

10

F= Forecast. Values are adjusted using the chain-type GDP deflator, 2018=100Source: USDA, Economic Research Service, Farm Income and Wealth StatisticsData as of November 30, 2018

Farm Sector Balance Sheet Remains Strong

0

500

1,000

1,500

2,000

2,500

3,000

3,500

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

$ Bi

llion

s (20

18)

Debt Equity

2018F

Assets = Debt + Equity

11

0.00

0.05

0.10

0.15

0.20

0.25

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Debt

to A

sset

Rat

io

F= Forecast. Source: USDA, Economic Research Service, Farm Income and Wealth StatisticsData as of November 30, 2018

Are more operators at risk of becoming insolvent?

𝐷𝐷𝑇𝑇𝐷𝐷𝐷𝐷 𝐷𝐷𝐶𝐶 𝐴𝐴𝐼𝐼𝐼𝐼𝑇𝑇𝐷𝐷 𝑅𝑅𝐶𝐶𝐷𝐷𝑅𝑅𝐶𝐶 =𝑇𝑇𝐶𝐶𝐷𝐷𝐶𝐶𝑃𝑃 𝐷𝐷𝑇𝑇𝐷𝐷𝐷𝐷𝑇𝑇𝐶𝐶𝐷𝐷𝐶𝐶𝑃𝑃 𝐴𝐴𝐼𝐼𝐼𝐼𝑇𝑇𝐷𝐷𝐼𝐼

2018F

12

More large farms are becoming highly leveraged

0%

5%

10%

15%

20%

25%

30%

35%

2000 2002 2004 2006 2008 2010 2012 2014 2016

Perc

ent w

ith D

ebt t

o As

set R

atio

> 0

.4

Less than $100,000 GCFI $100,000 - $500,000 GCFI Greater than $500,000 GCFISOURCE: Economic Research Service, using USDA data from ERS and NASS, Agricultural Resource Management Survey, 2000 - 2017

13

Highly leveraged farm businesses are younger, larger than farms with low leverage

Debt to Asset Ratio

Percent of farms Acres Operator

Age

Gross Cash Farm

Income

Net Cash Farm

Income

Percent Rent

Less than 0.1 75% 573 63 187,432 54,463 34%

0.1 to 0.2 8% 946 57 592,130 167,729 62%

0.2 to 0.4 9% 1,139 54 677,774 171,593 67%

0.4 to 0.7 5% 970 51 748,704 151,753 73%

More than 0.7 3% 1,051 52 920,095 212,247 88%

All farms 100% 686 60 312,520 83,306 47%

SOURCE: Economic Research Service, using USDA data from ERS and NASS, Agricultural Resource Management Survey, 2017

14

Delinquency and Bankruptcies, 1987 to 2018F

Data Sources: Bankruptcy data through 1987 from Stam et al., 1991. Subsequent data comes from U.S. Courts Statistical Tables. Delinquency Rate comes from the Ag Finance Databook, Federal Reserve Bank of Kansas City.

0%

1%

2%

3%

4%

5%

6%

7%

0

5

10

15

20

25

1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017

Delin

quen

cy R

ate

(% o

f tot

al v

olum

e)

Bank

rupt

cies

per

10,

000

farm

s

Bankruptcy Rate Nonreal Estate Delinquency Rate Real Estate Delinquency Rate

15

Conclusion

Some farm operators are showing signs that they are having trouble servicing their debt

Liquid assets were drawn on during the current period of lower net farm income, but may not be as readily available if lower farm incomes continue

Solvency measures have weakened, but remain strong by long-run historical comparison

16

2019 Forecast Scheduled for March 6th

Farm Sector Income and Finances:https://www.ers.usda.gov/topics/farm-economy/farm-sector-income-finances/

Contact Information: farmincometeam@ers.usda.gov