NEWS
Stress Test for Borrowers
Marcia Zarley Taylor DTN Executive Editor
Thu Apr 17, 2014 09:22 AM CDT
(Page 1 of 2)

HADDONFIELD, N.J. (DTN) -- U.S. commercial-sized farms may have binged on debt during the last decade -- investing in everything from pricey farmland to auto-steer farm equipment to jumbo-sized operating lines. But unlike heavily indebted consumers at the peak of the housing bubble, today's credit-intensive farmers are ending their investment streak in the strongest financial position in at least 20 years and maybe even rivaling the 1970s.

High-risk farms most vulnerable to an economic downturn have been declining since the 1990s, USDA's Economic Research Service found. (Graphic courtesy of USDA)

The question under debate by economists and farm lenders is whether that stockpile of cash and assets is capable of weathering a prolonged downturn in the farm economy or whether it's 1979 for farmers all over again.

Average debt owed by U.S. farm businesses jumped 39% between 1992 and 2011, even after adjusting for inflation, a new study by USDA's Economic Research Service (ERS) found. But despite more reliance on credit, the vast majority of farmers possess conservative debt-to-asset ratios with a huge cushion of equity should commodity prices cool and interest rates begin to tick upward. The USDA data is based on surveys of more than 20,000 farmers annually.

Real farm incomes this past decade never quite broke the all-time highs of 1973 when adjusted for inflation, said Jennifer Ifft, an ERS economist and one of the study's authors. But farm leverage peaked in the middle 1980s and has been on a downward trend ever since: The average full-time farm operator's debt-to-asset ratio hovered near 13% in 1992, but slid to 9% by 2011, the most recent data in USDA's study. That's less than half the 22% rate farmers averaged at the peak of the farm credit crisis in 1985, before years of loan write-offs and debt pay-downs began in earnest.

Even the nation's most potentially risky farm borrowers -- those full-time operators with debts 40% or more of their assets -- are shrinking in numbers. In 2011, only 5.3% of farm businesses held that leverage level, down from 9.5% in 1992, said Ifft. What's more, that highly leveraged category accounts for a shrinking share of total farm business debt compared to 20 years ago.

At least two potential trouble spots still exist should the farm economy take a prolonged tumble. Ifft worries most about young farmers whose numbers have shrunk drastically over the past two decades: Because they rent the bulk of the operations, young operators didn't benefit as much from the windfalls that accrued to landowners during this era. In fact, leverage levels for full-time farmers under age 35 remain as high today as they were 20 years earlier, about 19%, Ifft said.

Another potential concern is large-scale family farms -- defined as those with sales in excess of $1 million. They acquired 70% more debt during this period, the largest gains of any sized operations. While they borrowed an average of $684,400 in 1992, their total debt ballooned to $1.165 million in 2011 inflation-adjusted dollars. Increasing cash rents, land purchases and machinery costs contributed to those debt loads, burdens that may be hard to shed if commodity prices and repayment capacity shrink.

READY FOR $3 CORN?

Many forecasters predict leaner farm incomes and a return to much higher interest rates in the decade ahead, both of which have implications for land values and borrowers' repayment capacity.

Allen Featherstone, a Kansas State University economist, agrees farmers are on excellent footing at the moment, but cautions not to become complacent.

"We're probably in as good a position as we've been in the last 20 years, but in some respects they were in good shape in 1979, too. Then things changed very quickly," he said.

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