The Debt Drag

February 24, 2016 02:34 AM

Farmland values in jeopardy as debts grow and incomes drop 

During the past year, farmland values have stayed lower to steady. But a key financial metric is flashing warning signs for future values.

Until recent years, the majority of farmland had not been purchased with excessive debt, says Mike Walsten, editor of LandOwner newsletter, part of the Farm Journal Media family. Yet recent years of lower income have increased the national farm debt-to-income ratio. 

Red-Flag Ratio. For 2015, USDA put farm debt at $364.3 billion and net farm income at $56.4 billion. The result is a ratio of 6.5:1, which could rise to 6.8:1. 

TPS16 Takeaways
  • Watch the farm debt-to-income metric as a guide to the overall financial health of the U.S. agriculture industry. 
  • The sudden upswing in this metric demonstrates producers have not fully adjusted to the sharp downswing in incomes. 
  • Reduce debt and boost working capital to navigate a potential correction in farmland values, and consider buying land at a discount.

“The ratio has not been that high since 1985 when it was 6:1—near the end of the ag recession of the 1980s,” Walsten says. “This is unnerving because it highlights how agriculture as a whole has not yet fully adjusted to the sharp downswing in incomes.”

The metric reflects the overall financial health of ag, Walsten explains. “Agriculture has taken the first step toward a 1980s-type meltdown,” he says. “Debt has risen and incomes fell quickly. This doesn’t mean a meltdown will happen, but this is the first step.”

If the ratio stays above 6.1 for several years, a major collapse in land values could be ahead. “That would suggest farmland values will correct 50% to 60%, like they did in the 1980s,” he says. “If this is the case, producers will want to liquidate debt and boost working capital.”

Stress Sales. Some areas are feeling a reduction in operating capital, says Jim Farrell, president of Omaha, Neb.-based Farmers National Company, which sells hundreds of farms yearly. 

“We had some farm operators in 2015 not rent land again due to inability to get adequate financing,” Farrell says. “We’ve also seen farmers need to sell an 80-acre farm.”

Have a plan for making the debt payments on land even if incomes remain low, Walsten advises. 

Farm Debt Is Alarmingly High Compared to Income
A key driver of land values is national farm debt relative to income, says Mike Walsten, editor of LandOwner newsletter. Today’s ratio of 6.5:1 shows debt is more than six times greater than farm income. Data show the ratio could grow to 6.8:1 this year. 


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Spell Check

Kearney, NE
2/26/2016 07:29 AM

  If prices stay low for another year there will start to be a retrenchment in land values. Prices of some inputs are slightly down, but no where near by what prices are down. That will need to change rapidly if prices stay in the tank much longer as they are not sustainable. However, every supplier is waiting for the other guy to blink,.... Here in NE, real estate taxes have become a tremendous burden-on my farm they are the #1 expense item in my budget. That won't change for years because it's much easier to screw a few farmers while hoping for a turn around than it is to make fair and equitable changes in tax policy. We will pay for the Fed's ZIRP induced land bubble for a long time.

bad axe, MI
2/26/2016 08:53 AM

  I thought we were living in utopia according to the Fed. All you ever heared the last 7 years on all these Ag media centers every thing is in a state of utopia, and if you don't buy now it's only going to cost you more tomarrow. I think this thing is alot worse than this article is saying . All of this credit the farmer uses from the supplyer usually dosen't have a U.C.C, filing done on it , so it's not counted in these reports. Just remember on all of this when the farm crisis of the 80's was there was 4.7 trillion of total credit market debt now there is 64 trillion. The population of this country only has grow 23% since the 80's, but it's aged .There is no way to service all this debt, so it has to implode to correct the system in the near future. After all the Fed said they have the land inflated 330% more than what it should be .

Grant, NE
2/26/2016 08:58 AM

  I'm not an accountant but was depreciation (equipment purchases) handled the same way in the 80's as it is now? The net income figure would be a lot different and comparing this ratio to the 80's would be skewed. Either way, commodity prices need to improve or we will all be in trouble whether we have debt or not.


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