Over the past several decades, we have seen volatility in the amount of farm debt relative to the value of farm assets. Following the 80’s, we saw a steady decline in debt-to-asset ratios through 2008 but have seen a substantial increase over the last decade as farm debt-to-asset ratios have reached a 20-year high. Both real estate and non-real estate farm debt contribute to the near record high debt-to-asset ratio, driven by the continued downward pressures in the ag economy.
Looking forward, the American Farm Bureau Federation projects that we will continue to see a climb in the farm debt-to-asset ratio. They project the ratio to reach 13.9% over the next year which will be the seventh consecutive year of increases. One solution producers are implementing to overcome this challenge is to roll short term debt into long term notes. Lenders are reacting to this distressed environment by tightening lending requirements. The American Farm Bureau Federation has taken the position that this option is not a sustainable solution for farmers. With the 2019 crop year underway, we are optimistic trade deals will help relieve downward commodity price pressures and provide producers with increased financial flexibility.
*Source: USDA ERS. Farm Bureau Analysis
The chart above from the USDA illustrates the rise in farm debt-to-asset ratios. The current commodity price cycle has been a primary driver in overall farm debt. Overall, the increased debt-to-asset ratio requires producers to have more cash available which is challenging for most in today’s farm economy. Many farmers in low cash situations have given up high rent farms, sold some equipment or sold land with lease or buyback provisions. The Peoples Company Land Investment team has been involved in several of these situations.
One item that could significantly influence the debt-to-asset ratio and add additional stress to the economy is if agricultural land overall were to see a significant reduction in market value trends.
For more information on the current farm economy, feel free to reach out to a Peoples Company real estate professional.