ALTHOUGH overall U.S. farm debt remained stable from 1992 to 2011, younger operators, large-scale family farms and dairy and poultry farms currently are in the riskiest financial position, according to the "Debt Use by U.S. Farm Businesses" report from the U.S. Department of Agriculture's Economic Research Service (ERS).
In the study, ERS economists Jennifer Ifft and Kevin Patrick and former intern Amirdara Novini evaluated data collected on farm businesses — farms with annual gross cash farm income of more than $350,000, smaller family farms whose principal operator reports farming as his or her major occupation and non-family farms — from the "Farm Costs & Returns Survey" and the "Agricultural Resource Management Survey" to determine a basic use pattern from 1992 to 2011.
On the whole, the average farm business debt-to-asset ratio was 0.13 in 1992; it rose to 0.15 in 1997 but declined to 0.09 in 2011.
Farm incomes have been rising since 2000. In fact, since 2011, inflation-adjusted income for the farm sector has been near record highs, ERS reported. With record-high income levels and higher farmland values, farmers and ranchers increased their overall debt while reducing financial leverage.
In the 1992-2011 time period, farm businesses' total debt increased 39% in inflation-adjusted terms, and farmland values nearly doubled. At the same time, production and machinery expenses also rose, which contributed to increased debt use. Additionally, lower interest rates during the time period made securing loans attractive options for farmers and ranchers.
Over the 20-year period, the types of major debt did not change significantly. For the most part, the majority of farm debt, roughly 60%, was in real estate, while the remainder was split equally between non-real estate debt and short-term debt.
Even though total farm business debt increased from $100 billion in 1992 to $139 billion in 2011, a shift occurred in the debt share of different farm business types over that period. The debt share by large-scale family farms increased from 16% in 1992 to 35% in 2011, whereas small family farms reduced their debt share from 47% to 27% during the same time period. The share of debt for midsize family farms and non-family farms actually held steady over those 20 years.
Moreover, the number of large-scale family farms increased over the two decades, along with the average debt per farm, which rose from $684,400 in 1992 to $1.166 million in 2011. The average debt held by midsize farms increased 16% to $305,900, and non-family farms' debt rose 58% to $244,100, while small family farms' debt decreased by 9%.
Since each commodity produced requires different financing, it is feasible for a wide variety of debt use patterns to exist across the various types of farming operations, ERS said.
Dairy and poultry, in general, face higher capital costs than other commodities. Therefore, as the report notes, dairy farms had the highest average debt-to-asset ratio (Figure). In addition, this sector underwent a significant structural change during this period that also contributed to increased debt.
Given that most poultry farms likely secure liens for the majority of poultry housing, those operations carry a higher amount of debt than other midsize to small family farms in other sectors.
The largest reduction in debt over the 20-year period was noted for farms that raised field crops, beef and swine. A lower debt-to-asset ratio for hog operations was generally attributed to those businesses also having substantially more cropland acres than similar-sized poultry farms and lower financing costs than dairies. Likewise, beef cattle operations benefited from the lowest average capital investments versus other livestock farms.
Still, field crops, which profited from rising farmland values from 1992 to 2011, registered relatively low debt-to-asset ratios.
From a geographic viewpoint, in 2011, the largest average debt-to-asset ratio of 0.12 transpired in the Northern Crescent, while the Basin and Range had the smallest ratios of 0.07 (Map).
However, since 1996, the average debt-to-asset ratio fell for all regions, with the largest reduction occurring in the Mississippi Portal and the Basin and Range regions.
As indicated in the 2012 USDA "Census of Agriculture," the average age of U.S. farmers and ranchers is climbing. Farm business debt-to-asset ratios typically decline as the farm operator ages, while younger farmers tend to use debt to expand operations. Therefore, as expected, older operators' debt levels steadily declined over the 20 years studied.
Still, there was a fluctuation in debt use, especially for farmers and ranchers ages 54 and younger, corresponding with farm income levels.