Farmers Cope With Cash Crunch

March 9, 2018 02:32 PM
Farmers Cope With Cash Crunch

Even though farm income has halted its rapid decline, 2018 looks to be another year of tight profit margins. USDA forecasts net farm income, a broad measure of profits, 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.
Farmers’ working capital is forecast at $56.2 billion in 2018, a 16% drop from 2017, and a result of declines in farm income and current assets coupled with an increase in debt.

Meanwhile, farm debt is forecast to increase by 1% to $388.9 billion this year. That is led by an expected 1.2% jump in real-estate debt. The debt-to-asset and debt-to-equity ratios are about even with a year ago and well under the 1970 and 1980 levels.

Farmers’ debt load is the silver lining to this bearish snapshot of farm finances. “USDA’s figures indicate farmers, while stressed, are keeping debt levels relatively under control,” says Mike Walsten, consultant and columnist for LandOwner, a sister publication of Farm Journal.

Debt levels soared in the late 1970s and early 1980s, which triggered a rush to liquidate farmland to pay off debt by lenders who were facing their own financial woes, Walsten explains.

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

While some farmers have had to partially or entirely liquidate farm assets, most were cautious about adding new debt during the commodity-price explosion, Walsten says.

“We may see some asset liquidation in 2018 or 2019,” he says. “Talk of sell-leaseback farmland sales has been more common this winter, for example. But currently there does not appear a flood of farmland will head to the market this year.”

Another positive indicator is the debt-to-income ratio is still restrained at 6.5:1. “This ratio is a reliable early indicator of a potential collapse in farmland values,” Walsten says. “It is well in the caution zone, which starts at 6:1, but it’s not soaring into the danger zone.”

When the ratio rose above 6:1 in the 1970s, it continued to rise and the ag recession of the 1980s was inevitable.

“Today’s ratio shows farmers, lenders and the industry have time to work through the collapse in farm incomes,” Walsten says. “It also keeps us confident the market is merely undergoing a manageable correction in a long-term bull market.”

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Spell Check

West, IL
3/11/2018 05:50 PM

  The problem is this. The actual operators are carrying too much debt. All the observations regarding overall debt loads is irrelevant. The fact that your landlords carry no debt isn’t helping the operator who is paying him too much rent and is destroying his net worth and working capital. The bankers are running out of time in stretching out payments and ignoring the past 4-5 yrs of poor performance.

bad axe, MI
3/9/2018 06:29 AM

  With 14 times more credit market debt in this country now than there was in 1980 , I have a hard time to believe there is not a problem with debt in the ag sector. Debt ratio's on farmland will be lower now because you hyper inflated them so much in the last 15 years. They took land around here from $1,200.00 an acre in 2000 to $10,000.00 an acre in 2015 ,so by saying that your debt to asset ratio's would be lower . When FED has to start pulling all this fiat money out of the system they printed the last 20 years that is not being used around the world for bank reserves since everyone is switching to the China Yuan, using high interest rates to do that . It's going to make the 80's look like a church picnic.

Mitchell, SD
3/9/2018 10:07 AM

  Right on Ax Man from Mi. I've also brought up this fact, to several "Who are suppose to be in the Know", and keep writing the same old BS crap......about the overall health of the American Agricultural balance sheet........True, Asset values have risen.......a TON....debt has also risen!! In fact, I believe that total debt in American Ag is now the highest ever!! If that is the case, what happens to the Debt to Asset ratio, when you take 10-15-20% or more off of the inflated Ag RE values......oh ya, baby!! It don't look so healthy now does it.....Also, in this total Ag Balance sheet of America, there are several MILLION acres owned by NON-farmers, but that Value of that land, with NO DEBT is included in the overall America balance sheet......debt is concentrated in the Operating Farmers......What does that balance sheet look like, of just the Operating farmers?? Not nearly as healthy........And then NON farming landlords, ARE NOT going to bail out the others, they will just come in and buy more land, and buy it "THEIR PRICE".......This aint over yet baby!! Hang On!!


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