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September 1, 2010

Debt Still High for Certain Producers

While the overall debt situation for agriculture has considerably improved, debt levels of a small subset of farmers remain relatively high, according to Jason Henderson, vice president and Omaha Branch executive with the Federal Reserve Bank of Kansas City. Larger farming operations, livestock operations and operations owned by young farmers have higher debt ratios and less ability to service debt than other operators.

One measure of the ability to repay debt is the debt repayment capacity utilization (DRCU) index, which takes into account debt obligations in relation to maximum debt repayment capability. A DRCU index below 100 indicates that the borrower has enough income to service the debt. Conversely, a DRCU index above 100 infers the borrower does not have enough income to service the debt.

Farming operations with annual sales up to $100,000 have a DRCU index below 15. In contrast, farms with annual sales between $100,000 and $5 million have an average index between 25 and 30, and farms with more than $5 million in annual sales have an index of 37. "Larger operations tend to be more capital-intensive, using more equipment than smaller farms," Henderson says.

Livestock operations also have higher debt use in recent years, due to shrinking profit margins. In 2008, hog farms had the highest DRCU at 47, followed by poultry at 44 and dairy and cattle operations at close to 40.

Operations owned by young and less experienced farmers have high debt levels because they are typically still financing the initial startup costs of a farm operation, Henderson says. In 2008, 56% of all farm enterprises headed by operators 35 or younger had debt, compared to only 19% headed by farmers 65 or older. Also, the debt-to-asset ratio was highest (21%) among farm operations headed by younger farmers.

"Still, overall farm debt levels remain near historical lows," Henderson adds. "And a rebound in farm profits should help bolster farm income statements and balance sheets." He’s still hopeful for a farm rebound, spurred by a global economic recovery that could open credit flows and foster additional investments back into U.S. agriculture. —Jeanne Bernick

By the Numbers I A quick look at debt levels for agricultural producers, by age and year

56% Farms with debt that are owned by operators who are 35 or younger

19% Farms with debt that are owned by operators who are 65 or older

60% Farmers who reported using debt in 1986

31% Farmers who reported using debt in 2007

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FEATURED IN: Top Producer - September 2010

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