The balance sheet of the US agricultural sector has improved significantly compared to 2020 – AgFax
Mid-season soybean field. Photo: University of Minnesota
The net worth of U.S. farms in 2022 is 27.7% higher than in 2017 and 42.7% higher than in 2012. Over the past 10 years, net farm income has been above the long-term average. term (i.e. the average from 2007 to 2022) from 2012 to 2014, and in 2021 and 2022, but below the long-term average from 2013 to 2020.
Thus, the increase in farm equity is due to a more than relatively high net farm income. This article deals with the evolution of the balance sheet of the American agricultural sector as well as the liquidity and solvency ratios.
Trends in Real Assets and Debt
Before analyzing the current balance sheet of the agricultural sector, we will review the trends in real assets and real debt. Figure 1 presents the actual values of US agricultural sector assets and debt using 2021 as the base year. With the exception of 2022, values for each year represent end-of-year values.
Prior to 2012, the peak of real assets occurred in 1979 at a value of $2.837 trillion. In 2012, real assets in the agricultural sector totaled $3.048 trillion. Since 2012, real assets have exceeded $3 trillion. Real assets are expected to reach a new high of $3.618 trillion in 2022. This represents an increase of 3.4% from the previous peak in 2021.
Real agricultural sector debt in 2022 is expected to reach $467.9 billion, down 1.3% from the previous year. If realized, the decline in real farm debt in 2022 would represent the first decline in total debt since 2012. Current farm sector debt is 36.1% higher than the 2012 value and 10.0% higher at 2017 value.
The projected equity of the agriculture sector in 2022 is $3.15 trillion, which represents an increase of 4.2% over the previous year. The real equity of the agricultural sector in 2022 is 16.5% higher than the value in 2012 and 10.6% higher than the value in 2017.
Balance sheet of the agricultural sector
Table 1 presents the balance sheet of the US agricultural sector for 2012, 2017 and 2022. The values in Table 1 represent nominal values rather than inflation-adjusted values. The 2012 and 2017 balance sheets represent the year-end balance sheets. The 2022 balance sheet represents forecast values, which have been updated on September 1, 2022.
The predicted values for 2022 for animals and products, machinery and motor vehicles, and real estate were higher than their respective values in 2012 and 2017. In contrast, the values for financial assets, purchased inputs, and stored crops were higher in 2012 than they were in 2012. 2022. The increase in property values over the past 10 years is particularly noteworthy. Real estate values were 53.7% higher in 2022 than they were in 2012.
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Total farm debt in 2022 was 66.7% higher than total farm debt in 2012. Most of the increase can be attributed to an increase in real estate debt, which increased by 97.2%. Despite net farm income from 2013 to 2020 being below the long-term average, farm equity in 2022 was 42.7% higher than in 2012.
A common size balance sheet for the US agricultural sector is shown in Table 2. Common size balance sheets use percentages rather than actual dollars and are useful for comparing balance sheets across farms or years. The percentage of assets represented by financial assets, purchased inputs, stored crops and animals and products was 12.2% in 2012, 8.7% in 2017 and 8.5% in 2022. Machinery and motor vehicles accounted for 8.4% to 9.2% of the total. assets in 2012, 2017 and 2022. Currently, real estate accounts for approximately 83% of total assets.
Non-real estate debt as a percentage of total assets in 2022 was lower than in 2012. Conversely, real estate debt in 2022 was somewhat higher as a percentage of total assets than it was in 2012 and in 2017. Non-real estate debt as a proportion of non-real estate assets is currently 23.8% while real estate debt as a proportion of real estate assets is 10.7%.
Total farm debt as a percentage of total assets (i.e., debt-to-asset ratio) in Table 2 ranged from 11.3% in 2012 to 13.0% in 2017. Long-term trends in the debt-to-asset ratio for the US agricultural sector will be further discussed below.
The USDA-ERS reports the average current ratio and average working capital to value of farm production since 2009. Working capital is calculated by subtracting current liabilities such as operating debt and current portion term debt of current assets such as financial assets, inventories of purchased inputs, and inventories of crops and marketable livestock.
The average current ratio for the agricultural sector increased from 2.87 in 2012 to 1.59 in 2016, then increased from 1.63 in 2017 to 2.37 in 2021. The current ratio projected for 2022 is 2.16. A commonly used reference for the current ratio is 2.
The average ratio of working capital to the value of agricultural production fell from 0.37 or 37% in 2012 to 0.16 in 2016, 2017 and 2018, then increased from 0.18 in 2019 to 0.25 in 2021. The projected ratio of working capital to the value of agricultural production for 2022 is 0.21 or 21%.
A commonly used benchmark for this ratio is 20%. Although not extremely high, the liquidity ratios in 2022 are much better than the ratios recorded from 2015 to 2020.
Solvency ratios, such as the debt-to-asset ratio, provide an indication of the farm’s ability to repay all of its financial obligations if all assets are sold, as well as an indication of the ability to continue operations as a a viable farm business after a financial hardship, such as a drought.
Figure 2 illustrates the debt-to-asset ratio of the US agricultural sector since 1973. The debt-to-asset ratio peaked in 1985 at 22.2%. The debt-to-asset ratio has been below 15% since 1999. The debt-to-asset ratio of 2022, at 12.9%, is one full percentage point lower than the debt-to-asset ratio of 2020, which represented the debt-to-asset ratio of highest asset since 2002.
The balance sheet for the U.S. agricultural sector represents a marked improvement over the 2020 balance sheet. The main reasons for the improvement in financial conditions are the strong net farm income recorded in 2021 and 2022, and recent increases in land values. Currently, the liquidity and solvency of the US agricultural sector is relatively strong.
This article focused on the US balance sheet of the agricultural sector. Regional changes in the balance sheet are probably quite different from changes at the national level. Differences in regional and national balance sheets reflect differences in how land values have adjusted in recent years, and regional differences in the composition of businesses. A future article will compare common-size balance sheets in the United States with those of full-time farms.