Source: USDA'S ECONOMIC RESEARCH SERVICE, 10/22/19



Highlights:
• Farm-level measures of solvency, liquidity, and repayment capacity indicate that farms with at least $100,000 in annual sales were more likely to be under financial stress than smaller scale operations in 2017, the most recent year analyzed by ERS.
• Among farms with at least $100,000 in annual sales, the share having a low repayment capacity or low levels of solvency has increased since 2012, but levels of financial stress in 2017 were near 20-year averages and not as severe as levels in 2002.
• If gross cash farm income were to fall from 2017 levels, the share of farms in extreme financial stress would increase relatively more for larger scale farms, for farms with a principal operator under age 40, and for dairy farms.

Recent economic conditions have raised concerns about the financial health of the U.S. farm sector. After peaking around 2012, farm sector income has declined while farm debt has continued to rise. Farm real estate is no longer rapidly appreciating in value, and land prices have declined in some regions. Interest rates have trended upward in recent years—increasing the cost of borrowing for some farmers. If commodity prices were to decline in the near future, some farmers would find it difficult to meet their loan obligations while also paying for production expenses.

Recent ERS research examined farm-level data from the USDA’s annual Agricultural Resource Management Survey (ARMS) to determine how current economic conditions in the agricultural sector compare with those in past periods of financial stress.

The study identified which types of farms are financially vulnerable, and which would be likely to face the most challenges if commodity prices declined further. The study looked at multiple measures of a farm’s financial health, including repayment capacity, liquidity, and solvency. Lenders often use these measures to assess the financial stability and performance of farm operations. To gain insight into how farms would be affected if farm income continued to decline in the years ahead, the study simulated the effect of a further decline in gross cash farm income (GCFI) on the share of farms in extreme financial stress, which is defined as having a debt-to-asset ratio greater than 55 percent and not having enough household income to meet current loan payments. A high debt-to-asset ratio implies a limited ability to pay loan obligations through the sale of assets and hence a greater risk of default.

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