It's Not Over: Debt Discipline Needed

October 10, 2017 04:48 AM
money matters

USDA data might have some thinking the worst is over for the correction in farmland prices. But it’s too soon for farmers, landowners and lenders to relax the debt discipline they’ve been exercising in the past few years.

A key indicator shows debt levels are at a tipping point—a boost in debt or decline in income could be fatal for the farmland-price correction.

USDA’s revised net farm income projections show a slight uptick for 2017 versus 2016, putting 2017 net farm income at $63.4 billion (up 3.1% from 2016). USDA previously projected an 8.7% decline compared to 2016.


Uptick in Net Farm Income

USDA’s solvency ratios also improved in the most recent update. The debt-to-equity ratio is now pegged at 14.5:1, up slightly from 2016 and down from the earlier projection of 16.2:1. The debt-to-asset ratio is now 12.7:1. These ratios are below levels seen in the late 1970s and the  recession of the 1980s.


Farm Sector Solvency Ratios Improve

The debt-to-income ratio says the ag industry is still in profit-squeeze mode, as debt levels rose last year and remain high. Total debt divided by total net farm income yields a ratio of 6.15:1. That’s down from the 6.3:1 projected earlier, but it is still nearly even with the 6.1:1 seen last year. The current projection is the highest since 1985 when it was 6:1 near the end of the farm crisis. Farmland values bottomed in 1986 and 1987. A move above 4:1 is a warning of danger for the farmland market.


Warning Signs in Debt-to-Income Ratio

The key is to keep the ratio from rising. That can be done by boosting income (not likely) and by not increasing debt. It will take continued discipline to resist the urge to boost borrowing to maintain current spending. But, an industry-wide boost in debt could result in another leg down in farmland prices.


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Spell Check

Western, NE
10/10/2017 08:57 AM

  Based upon commodity prices and input costs in my area, ground shouldn't be higher than $300 an acre. Irrigated ground maybe $1,500. Fat chance of seeing that with foreigners buying ground like no tomorrow.

Cayuga , IN
10/10/2017 03:40 PM

  Brazil and Argentina can feed the world, the American farmer was sold out years ago.


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