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Farm assets, equity seen record; debt, however, highest since 1986.
U.S. farm assets are expected to set a new record in 2012 and drought the past two years will "not have and immediate effect on the sector balance sheet since farm asset values and debt levels tend to be based on expectations for long-term profitability," according to the updated farm income forecasts released by USDA's Economic Research Service (ERS) today.
"The most important factors affecting the value of U.S. farm sector assets, debt, and wealth (equity) in 2012 are expected growth in net income and favorable borrowing costs," ERS said. "Farm asset values are expected to rise 7.0% in 2012, to $2.55 trillion. Farm sector debt is expected to increase 2.7% to $261.0 billion. As a result, farm equity is expected to increase to $2.29 trillion in 2012."
Farm Sector Assets
Farm sector assets are expected to rise in 2012, due mainly to a projected increase in the value of farm real estate. The value of livestock and poultry inventories is forecast to decline. Despite the 2011 and 2012 droughts, farmland values are expected to continue rising, given the strength of commodity prices, accommodating interest rates, and expectations of continued favorable net returns both from the market and from government programs.
Real Estate Debt
Farm real estate debt is forecast to be $145.1 billion for 2012, a 0.6-percent decrease from the 2011 estimate. Three main factors will affect agricultural sector real estate debt markets for the remainder of 2012: farmland values, sector net cash income, and farm real estate loan interest rates.
As land values continue to rise in some parts of the country, the effect on real estate debt depends on the profits that can be made from the land at prevailing interest rates. Farm operators appear willing to pay up to maximum values for land based on expected profits accruing from the land's best use. Limited availability of prime farmland for sale in many areas of the country increases competition for available farmland. Interest rates are expected to remain low throughout 2012 and funds should continue to be available for well-qualified borrowers. At current levels of commodity prices, expected net cash income is at record levels, providing good prospects for debt repayment and possibilities for self-financing. Beyond that, high levels of cash reserves should dampen increases in farm real estate debt.
Non-Real Estate Debt
The non-real estate debt forecast for 2012 of $115.9 billion (up 7.2% from 2011) is principally driven by increases in working capital (current assets less current liabilities) and capital spending (mainly for machinery and equipment). During the initial quarters of 2012, farmers continued to invest substantially in equipment, structures, and land improvements.
Non-real estate loan activity increased in the first half of 2012, with average loan sizes increasing relative to 2011. Farm operators are trying to lock in low interest rates for the longest term possible to minimize costs. Meanwhile, agricultural lenders favor variable-rate loans and loans with shorter maturities. In addition to debt financing, an increasing number of operators are using cash to finance their input costs.
Farm Sector Solvency Ratios
The farm sector's debt-to-asset ratio is expected to decline from 10.7% in 2011 to 10.2% in 2012, and the debt-to-equity ratio is expected to decline from 11.9% in 2011 to 11.4% in 2012. These declines indicate that the farm sector's overall solvency position is strong.
Farm Balance Sheet Estimates and Forecasts: Caveats
Asset values and farm debt outstanding are fundamentally driven by current and expected returns on investments in farmland and other farm capital, and by interest rates. These factors vary across the country and over time, reflecting differences in expected net returns on crop and livestock portfolios, demand for farmland for non-farm uses, credit market conditions, and opportunities for non-farm employment and investments. Future interest rates on farm investments will depend on the strength of the macro economy, U.S. monetary and credit policies, and on the extent to which market interest rates reflect the full opportunity costs of capital. Uncertainty related to the 2012 drought could affect future farm asset and debt values due to increased volatility in output and inputs markets, and an increase in the market price of risk. The location and magnitude of these drought impacts will depend on how rapidly the market adjusts to these impacts, and if these climate impacts are perceived as temporary or recurring.
Unused Debt Repayment Capacity Expected to Increase Slightly in 2012
Debt repayment capacity utilization (DRCU) is the percentage of actual farm debt outstanding relative to the maximum feasible farm debt supportable out of farm income in any given year. A value exceeding 100% indicates that debt payments must be made by drawing on additional cash sources, such as taking on additional debt, earning off-farm income, drawing down household assets, or selling farm business assets.
Farm sector DRCU is expected to decrease slightly from 34.1% in 2011 to 33.8% in 2012. Values in both years are lower than the next lowest value (37% ) reported in 1973. A decrease in DRCU indicates that a smaller portion of net cash earnings is needed to repay farm debt, leaving more farm income available for business investments. Two factors are contributing to the slight decrease in DRCU expected in 2012. Farm sector debt is estimated to increase from $254 billion in 2011 to $261 billion. However, net cash income is also expected to increase. When combined, these two factors should increase the sector's maximum feasible farm debt and unused debt repayment capacity in 2012.