Key Debt Ratio Edges Deeper into Caution Zone

March 14, 2018 05:00 AM
There’s good news and bad news in USDA’s latest forecast of net farm income for 2018. Let’s take a look.

There’s good news and bad news in USDA’s latest forecast of net farm income for 2018. Let’s take a look.

The bad news: USDA forecasts net farm income will decline nearly 7% from 2017 to just under $60 billion for this year. This would be its lowest in nominal terms since 2006. Net cash income is forecast to decline 5% to $91.9 billion—its lowest since 2009.

The continuing weakness in farmers’ financial standings puts pressure on cash rents and further dampens farm-operator demand for farmland.

USDA also forecasts farm debt will rise again in 2018, with a boost in real estate debt leading the increase. For 2018, the agency estimates farm debt at $388.9 billion.

Farmers' Debt Levels Remain Muted

The amount of new debt added remains constrained. Debt levels soared in the late-’70s and early-’80s, which made it impossible for the meager earnings generated from operations to service. That triggered a rush to liquidate farmland to pay off debt by lenders who were facing their own financial woes.

This time, lenders are in generally healthy financial condition and were cautious about saddling customers with high debt loads during the surge in farm incomes. This puts lenders in position to work with cash-strapped farmers rather than rush to liquidate farm assets and land.

Likewise, farmers in general were more cautious about adding layers of new debt during the commodity price explosion.

There are exceptions, of course. Some operators have already been liquidated either entirely or partially. Others are facing their tough financial reality now, which could result in some asset liquidation in 2018 or 2019. Talk of sell-leaseback farmland sales has been more common this winter, for example. But currently it does not appear a flood of farmland will head to the market this year.

USDA’s figures indicate farmers, while stressed, are keeping debt levels relatively under control. The debt-to-asset and debt-to-equity ratios are about even with a year ago and well under the levels of the ’70s and ’80s.

More importantly, the debt-to-income ratio is still somewhat restrained. (We cover this ratio frequently because we feel it is a reliable early indicator of a potential collapse in farmland values.) It is well in the caution zone, which starts at 6:1. But it’s not soaring into the danger zone like it did in the last farm crisis.

Debt-to-Income Ratio Edges Higher

This gives farmers and the industry time to work through the collapse in farm inc-omes. It also keeps us confident the market is undergoing a manageable correction in a long-term bull market.

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Spell Check

Adam Skinner
Dodge City, KS
3/16/2018 09:22 PM

  It's scary to think how much control farmers have over our food supply and their to stupid to do anything about it. www.

bad axe, MI
3/16/2018 07:24 AM

  You failed to report the credit market debt in this country is 14 times higher than what it was in 1980. It went from 4.7 trillion in 1980 to 70 trillion in 2018 that's why your posted ratio's don't look as bad as 1980 . The Fed can hyper inflate asset values in this country through debt creation , but the asset appreciation is unsustainable . Take $3,500.00 per acre which is the maximum most banks will borrow per acre than run your ratio's it's worse than it was in the 80's. You are using $10,000.00 per acre base line for your ratio's sure it's going to give a rosy picture. Debt-To-Income Ratio at $3,500.00 per acre is closer to 15% to 20%. 70% of all farmland in the US is rented by the producer so this thing is really bad.

Arnold Coggeshall
Torrance, CA
3/16/2018 10:22 AM

  Most business and farming banks use a debt-to-income ration of 1.50:1.00 which means in the calculation of cash flow for every one dollar of debt incurred that should be an equivalent of one dollar and fifty cents of cash flow availability.