Farmland Markets and Farm Business Finances

Jennifer IfftFarm Economy Branch

Rural and Resource Economics DivisionUSDA Economic Research Service

Motivation• U.S. cropland values have more than doubled since

2004– High farm income, low interest rates

• Baseline farm income projections and expectations for increasing interest rates suggest stabilization or downward adjustment of farmland values

• What are the implications for farm businesses? – Farmland affordability– Farm leverage– Concentration of debt

Outline• Farmland value trends• Farmland affordability• Impact of a potential decline of farmland

values on farm business leverage

Farm income is a key driver of recent increases in cropland values

Note: Urban influence levels based on ERS PIZA codes; Source: USDA/NASS June Area Survey, 1999-2013

19992000

20012002

20032004

20052006

20072008

20092010

20112012

20130

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

Median Cropland Value

High Urban Influence Medium Urban InfluenceLow Urban Influence Rural

Dollars per acre

Housing boom

19992000

20012002

20032004

20052006

20072008

20092010

20112012

2013F0

20

40

60

80

100

120

140

Net farm income and net cash income, 1999-2013F

Net farm income Net cash income

Source: USDA-ERS Farm Sector Accounts,

$ billion

Identifying the component of farmland values supported by agricultural returns

• Urban vs. rural farmland values may be confounded by different agricultural production values– Farmland can also be purchased as a productive asset or for

investment purposes• Ratio of cropland values to capitalized rents (NPV)

– “Price-to-Agricultural Value Ratio”– Capitalized rents proxy for agricultural use value

• Rents/discount factor (10 year U.S. Treasury note)

• 1 implies market value = agricultural land use value – Higher ratio implies larger non-agricultural influence or an imbalance

between agricultural returns and farmland prices – Lower ratio implies farmland values are more closely aligned with

agricultural returns

High Farm Incomes and Low Interest Rates Have Supported Cropland Values in Recent Years

Source: USDA/NASS June Area Survey, 1999-2013

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20130

2

4

6

8

10

12

14

High Urban InfluenceMedium Urban InfluenceLow Urban InfluenceRuralOne

Med

ian

Price

-to-

Agric

ultu

ral V

alue

Rati

o

Extreme values of the price to value ratio drive up the average relative to the median

Source: USDA/NASS June Area Survey, 1999-2013

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20130

2

4

6

8

10

12

14

16

18

High Urban InfluenceMedium Urban InfluenceLow Urban InfluenceRuralOne

Aver

age

Price

-to-

Agric

ultr

al V

alue

Ratio

Farm Sector Real Estate Affordability$ Billion

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017$0

$500

$1,000

$1,500

$2,000

$2,500

High income / low interest

Low income / low interest

High income / high interest

Low income / high interest

Actual farm sector real estate value

Real estate value that current farm sector income and in-terest rates could support

Real estate values that farm sector income and interest rates could support under different forecast scenarios

Source: USDA-ERS Farm Sector Accounts, baseline forecast

Farm Businesses

Farm businesses represent over 950,000 farms and account for more than 90 percent of production

9Source: 2012 Agricultural Resource Management Survey (ARMS), preliminary

Residence Intermediate Commercial0

10

20

30

40

50

60

70

80

90

Small farms (with gross cash farm income less than $350,000) whose operators report farming as their major occupation.

Farms with gross cash farm income greater than $350,000 and farms organized as nonfamily corporations or cooperatives.

Small farms whose operators report they are retired or they had a major occupation other than farming.

1,205,000

720,000

237,000

Farms

Production

Assets

Debt

Percent

Farm Business Finances

• Impact on farm business leverage of decreasing farmland values– 5%, 10%, 25%, 35% declines in farmland values– Average leverage– Share of farms with leverage > 40%– Share of debt held by farms with leverage >40%

• Historic perspective– Farm businesses currently at a historically low

leverage position

Farm business leverage with a decline in farmland values

• This indicates that on average lenders have left a substantial “cushion” for farmland values to decline

• A key assumption is that debt increases would not accompany a future decline in farmland values

Field Crops Specialty crops

Beef cattle Hogs Poultry Dairy 0

5

10

15

20

25

30

35

Debt to Asset Ratio

No Decline 5% decline 10% decline 25% decline 35% decline

Note: Field crops include wheat, corn, soybeans, sorghum, rice, tobacco, cotton, peanuts, other cash grains, and oilseeds. Source: 2012 Agricultural Resource Management Survey, preliminary

Concentration of farm business debt with a decline in farmland values

Field Crops Specialty crops

Beef cattle Hogs Poultry Dairy 0%

10%

20%

30%

40%

50%

60%

70%

Share of farms with debt to asset ratio > 0.40

No Decline 5% decline 10% decline25% decline 35% decline

Field Crops Specialty crops

Beef cattle Hogs Poultry Dairy 0%

10%

20%

30%

40%

50%

60%

70%

Share of debt held by farms with debt to asset ratio > 0.40

No Decline 5% decline 10% decline 25% decline 35% decline

Note: Field crops include wheat, corn, soybeans, sorghum, rice, tobacco, cotton, peanuts, other cash grains, and oilseeds. Source: 2012 Agricultural Resource Management Survey, preliminary

Impact of potential declines in farmland values by operator age

Note: Field crops include wheat, corn, soybeans, sorghum, rice, tobacco, cotton, peanuts, other cash grains, and oilseeds. Source: 2012 Agricultural Resource Management Survey, preliminary

34 or less 35-44 45-54 55-64 65 or greater0%

10%

20%

30%

40%

50%

60%

Share farm business with debt-to-asset ra-tio > 0.40

No Decline 5% decline 10% decline 25% decline 35% decline

34 or less 35-44 45-54 55-64 65 or greater0%

10%

20%

30%

40%

50%

60%

Share of a debt held by farm businesses with debt-to-asset ratio > 0.40

No Decline 5% decline 10% decline 25% decline 35% decline

Crop and livestock farm businesses with high leverage, 1993-2011

Crop D/A Ratio 0.41-0.70

Crop D/A Ratio 0.71 +

Livestock D/A Ratio 0.41-0.70

Livestock D/A Ratio 0.71 +

0%

2%

4%

6%

8%

10%

12%

1993199920052011

Debt-to-Asset Ratio and Farm Specialization

Shar

e of

Far

m B

usin

esse

s Cro

p/Liv

esto

ck S

ecto

r

Note: These two farm business specializations, crop and livestock, are determined by the specialization which constitutes the majority of each farm’s total value of production. Farm businesses definition accounts for inflation; Source: USDA, Economic Research Service and National Agricultural Statistics Service; 1993 Farm Costs and Returns Survey and 1999, 2005, and 2011 Agricultural Resource Management Surveys.

Conclusion• Median cropland values are consistent with current

cash rental rates and interest rates– Forecasts suggest future downward adjustment of

cropland values• A substantial increase in farm business leverage is

unlikely unless there is a large drop in land values– Debt is concentrated, especially among certain groups,

which may be a concern for lenders– Current income may be insufficient for debt repayment

for highly indebted farms if incomes decline below levels forecast for 2014