What is in this article?:
- U.S. agriculture entered the most recent recession better positioned than most U.S. industries.
- The farm sector was bolstered by several years of strong income growth, rising farmland values, and low dependence on debt.
- Strong demand for agricultural products has bolstered both the performance and prospects of U.S. agriculture.
Farmers limit credit use
U.S. farmers, by being cautious with debt financing, have generally avoided the problems in other sectors that are heavily reliant on debt. The debt-to-asset ratio for farm businesses has trended lower since the mid-1980s and is far lower than the ratios of corporate and noncorporate nonfarm businesses. Low debt use--as reflected in the debt-to-asset ratio and the interest coverage ratio--reduces both variability in net income and incentives for excessive risk taking. A high percentage of assets financed through debt indicates greater leverage and more financial risk. Overusing leverage leaves farms at risk, since the cost of financing this borrowing (interest payments) can outweigh the return provided by the expansion. Lower use of debt leverage by farms indicates fewer potential conflicts between lenders and farm business owners over risk and asset choices.
Interest coverage ratios, which are calculated by dividing a company's earnings before interest and taxes by the interest expenses, show a similar picture of relatively low debt burdens for farmers. Since 1990, interest coverage ratios for farm businesses have exceeded those of nonfarm, noncorporate businesses and corporate businesses. The relatively low debt use by agriculture reflects the conservative nature of farmers and their primary lenders, which has reduced the sensitivity of agricultural returns and equity to fluctuations in the general business cycle.
Within the farm sector, the use of debt leverage--and thus exposure to liquidity problems--tends to be higher for larger farms, livestock producers, and younger farmers. However, farm delinquency and default rates are expected to be stable in 2012-13; interest rates are expected to remain low for highly qualified farm borrowers; and farm commodity prices are expected to remain relatively strong. Based on data from the Federal Reserve Bank of Kansas City and the Farm Credit System, farmers remained cautious in their use of debt in 2011, as non-real estate farm debt was roughly unchanged in the first half of 2011 and farm real estate debt grew a modest 2.2 percent.
U.S. ag has exhibited less financial stress than other sectors
Agriculture has benefited from the health of its two primary lenders: rural commercial banks and the Farm Credit System. These two institutions held over 85 percent of farm debt in 2010. This institutional stability has enhanced the farm sector's ability to obtain credit and favorable interest rates.
Easy credit standards during the late 1990s and early 2000s, coupled with the severity of the recession, produced loan delinquency (30 days past due for commercial banks and 90 days for the Farm Credit System) and default rates near or above historical peaks for most categories of nonagricultural loans. While delinquency and default rates on agricultural loans at commercial banks have increased, they have remained far lower in relative terms than nonagricultural loans. Farm Credit System farm loan rates--and delinquencies--have also been lower than those at commercial banks. While delinquency rates on agricultural loans have risen moderately since mid-2008, charge-off rates (loans and leases removed from the books and charged against loan loss reserves) have remained below 0.40 percent.
Although farm loan delinquency and charge-off rates rose during 2008 and 2009, they remained moderate compared with other types of loans and low compared with agricultural loan delinquency and charge-off rates in the late 1980s. The decline in farm delinquency rates in 2010, coupled with high farm income in 2010 and 2011, indicated that farm loan charge-off rates were moving back toward long-term trend levels.