Farm Debt Levels Are Increasing
All in all, farm debt levels have increased, however, farmers have done a very good job of not letting these levels get out of control.
The United States Department of Agriculture has a very good print and online magazine called Amber Waves. Each issue generally has several good articles related to farming and I would highly recommend reading it each month.
In the December issue, the an article on how farm debt has increased and shifted in the last few years was highly informative. Here are the highlights of the article:
- Farm debt levels have risen sharply in recent years, but the growth in farm asset values has outpaced the growth in debt.
- Fewer farms end the year with debt outstanding than in the past; debt is more concentrated in larger farms
- Debt repayment capacity is expected to decrease this year, but remains well above levels seen in the later 1970s and early 1980s
US farm sector debt was estimated at $240 billion at the end of 2008, however it is expected to decrease by about $6 billion to $234 billion at the end of 2009. Total farm assets are estimated at about $1.8 trillion for a debt to asset ratio of only 13%. This ratio is about 2.7 times better than the low reached in the mid-1980s farm crisis.
In 1986, nearly 60% of farms reported having outstanding debt at the end of the year; by 2007, this figure had dropped to 31%. Larger farms are more likely to use debt than smaller farms. The majority of small farms indicated they have sufficient liquidity to finance their operations. Livestock operations tend to have higher levels of debt than crop operations.
At the end of 2007, 65% of farmers reported having no outstanding on their business balance sheet, however, these farms only average about 258 acres in size. 14% of farms reporting between $1 and $5 million in sales also reported having no debt outstanding at year-end.
Farms that reported having multiple loans with multiple lenders only represented 6% of farms, however, they had more than 31% of total farm debt outstanding.
Farm debt has increased more slowly than income. As a result, the ratio of debt to income has trended down from a ratio of five times annual farm income to less than three times annual income in 2007.
Debt repayment capacity utilization (DRCU) measures debt obligations in relation to maximum debt repayment capabilities. The lower the DRCU number the better. This measure has decreased from 27% in 2007 to about 18% in 2008.
Paul Neiffer is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers and agribusiness processors. Paul is a principal with CliftonLarsonAllen in Walla Walla, Washington, as well as a regular speaker at national conferences and contributor at agweb.com. Raised on a farm in central Washington, he has been immersed in the ag industry his entire life, including the last 30 years professionally. Paul and his wife purchase an 180 acre ranch in 2016 and enjoy keeping it full of animals.
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