Beware statistics. They can frighten or reassure. One financial adviser recently raised red flags based on this sobering fact: In the just past four years, U.S. farms and ranches have added total debt equaling $28.78 billion. That's a lot of debt.
In fact, total nominal farm debt is higher today than during the mid-1980s peak! But in inflation-adjusted terms, debt has been more or less steady, so maybe things aren't as bad as they sound.
During the four-year period in question, ag assets increased $741.5 billion, meaning each $1 in debt increase equaled a $26 asset increase. The debt-to-asset ratio continued to drop, to 9% this year. Contrast the 1980s, when debt was 16% to 22% of assets.
But that's not the whole story, says Purdue University Extension economist Chris Hurt, who expects USDA to downward adjust asset values. "The financial category and machinery account for $7.6 billion. Commodity prices have fallen since USDA's income report, and it will not take much more of the current farm economic conditions for land values to begin to drop,” he says.
Repeat of the 1980s? Hurt says balance sheet lending (lending on the assumption that values will continue to rise and improve balance sheets) in ag in the 1970s is similar to what has occurred in the general real estate market during the past decade. "It's too bad housing lenders did not study the lesson ag learned in the 1970s,” he says.
Following the 1972–75 income boom, we dropped to 1960s levels, but inflation and balance sheet lending drove land values upward. "This time, we have had the surge in income and that gave an initial burst to land values, but we hope to avoid the inflation period that led to sharply overinflated land values and the horror of the 1980s,” Hurt says. "Of course, there remains the possibility that our federal government will elect to have a more inflationary monetary policy as a way to reduce the pain of paying back the huge debts that we are taking on as a result of rescue packages, and that will unfold in 2010 to 2012.”