After three consecutive years of decline, net farm income is forecast by USDA to rise slightly in 2017. In its end-of-year update, USDA forecasts net farm income will increase 2.7% to $63.2 billion in 2017. While not quite as positive as USDA’s 3.1% rise forecast in August, it is still far better than USDA’s initial forecast for an 8.7% decline issued in February. Net cash farm income (without any inventory adjustment) is forecast to increase 3.9% to $96.9 billion.
Despite the forecast upturn in income, however, 2017’s net farm income level would be below all other years from 2009 through 2015 and net cash farm income would be below all years from 2010 to 2015. Debt levels continue to rise, raising concerns about working capital and debt repayment going into 2018.
Farm real estate debt in 2017 is expected to reach a historic, nominal high of $236.4 billion. The annual 4.6% rise in real estate mortgage loans reflects continued expected demand for cropland combined with increasing use of real estate as collateral to secure non-real estate borrowing and operating loans.
On an inflation-adjusted basis, total farm debt remains under the crushing levels seen in the 1980s. But the recent downturn in farm profitability is prompting a shift in debt from non-real estate debt to real estate debt.
Farm debt rose rapidly in the 1970s and peaked in the early 1980s during the high-interest-rate farm financial crisis. It declined as the farm sector reduced its reliance on debt financing and resumed trending upward in the 1990s. During that span, inflation-adjusted total farm debt peaked in 1981 at $413.4 billion (in 2017 dollars). For 2017, it is forecast at $385.2 billion. Inflation-adjusted real estate debt is forecast to reach an all-time high of $236.4 billion in 2017. Inflation-adjusted non-real estate debt, which peaked in 1979 at $199.1 billion (in 2017 dollars), has trended downward since 2014.
The farm sector debt-to-asset ratio and debt-to-equity ratios are expected to move slightly upward. Liquidity ratios have weakened over the past several years but remain below levels seen in the late 1970s and early 1980s. Working capital, which is the difference between current assets and current liabilities, is forecast at $65.3 billion in 2017, after averaging $114.4 billion from 2009 to 2016. The “current ratio,” which is current assets divided by current debt and is another measure of liquidity, averaged 2.26 during 2009 to 2016. However, it too is forecast down in 2017 to 1.57, after trending downward since 2012.
The 2017 debt-service ratio, which measures the share of production required to service farm debt payments, averaged 0.23 from 2009 to 2016 and, at 0.27 in 2017, is forecast at its highest since 2002.