The Farm CPA
Paul is now part of the fourth generation in America that is involved in farming and hopes the next generation will be involved also. Through his blog he provides analysis and insight to farmer tax questions.
Debt to Asset Ratio Looks Great - But!
May 14, 2013
The University of Illinois puts out a great daily email called the "Farm Doc Daily". In today's email, they summarized the debt to asset ratio from 2005 through 2011. The lower this ratio goes, the better. Their database showed that the average farmer in Illinois for 2005 had total assets per acre of $1,267 and related debt of $365. This resulted in a debt to asset ratio of 29%. For 2011, the total assets had increased to $2,385 while related debt increased but by a lower % to $500. This resulted in the debt to asset ratio declining from 29% to 21% in 2011.
Farmers have done a great job over the last few years in keeping this ratio low, however, you can note that total debt has increased from $365 to $500 per acre. I wondered how this ratio would change if we assumed that the three major asset categories used (crop and feed inventories, machinery and farm land) would each decrease by 10% or 20%. A 10% reduction would lower total assets from $2,385 to about $2,150 and would increase the ratio from 21% to 23%. A drop of 20% would put total assets at about $1,900 resulting in a ratio of 26%.
As you can see, even if all asset values decrease by 20%, farmers are still better off (using this ratio) than they would have been in 2005. To get to the same 2005 29% ratio would require an almost 28% drop in asset values.
Keep up the good work.