FARMLINE NEWS
SERVICE (USDA)
WASHINGTON - Some 214,000
American farms began last year
unable to pay the previous
year’s bills, according to a study
by economists of USDA’s
Economic Research Service.
That’s the bad news.
This figure represents around 12
percent of the farms that were
covered in a major survey by the
Agriculture Department early this
year. The brighter side is that the
majority of farms 88 percent
had either a positive cash flow or
were not overburdened by debt.
The 1984 Farm Costs and
Returns Survey provided detailed
financial information applicable to
1.7 million of the nation’s 2.3
million farms in other words, all
but the smallest farms.
Economists say that this survey,
considered to be the most com
prehensive to date, can help pin
point financially stressed farms by
type, size, and geographic
distribution.
While current financial stress is
not limited to any particular class
or size of farm or sector of
agriculture, says USDA economist
Jim Johnson, some groups have
been harder hit than others.
Johnson is quoted in a recent issue
of the department’s FARMLINE
magazine.
“The survey’s results enabled
economists to get a better grip on
the number of farms affected and a
clearer understanding of the types
and sizes of farms experiencing
financial stress,” he says. Among
the survey’s most important fin
dings, Johnson adds, is that,
“many more commercial-size
operations a#e in financial trouble
than most analysts previously
thought.”
Commercial-size farms those
selling $40,000 or more a year in
farm products form the back
bone of American agriculture.
Although they represent only a
little more than one-third of all
farms, they account for 90 percent
of all farm sales. “We found that at
least one in five commercial
operations was experiencing some
degree of financial stress,”
Johnson says. These farms were
carrying high debt loads and were
unable to generate sufficient cash
to pay their bills. Specifically:
• Almost 129,000 commercial
farms (20 percent of all farms with
annual sales of $40,000 or more)
were under financial stress
because they had both negative
cash flow and a debt-to-asset ratio
of more than 40 percent.
• Another 68,000 commercial
farms showed the potential for
financial stress because their debt
to-asset ratios exceeded 40 per
cent, even though their cash flow
was positive.
Perhaps even more significant,
Johnson says, the results of the
survey showed that midsize
commercial farms (those selling
USDA: 214,000 farmers are unable to pay debts
between $40,000 and $99,999a year)
were more financially stressed
than farms in any other sales
class. Of the 214,000 financially
stressed farms, Johnson says,
62,000 or 29 percent fell into
the midsize category. This figure is
particularly telling, he says,
because the farm in this class
account for only 18 percent of the
1.7 million farms covered in the
survey.
Degrees of Stress
Just how heavily leveraged an
operation is and what kind of cash
flow it can generate are two
measuring sticks that can be used
to determine the financial health of
a farm business.
First, survey data were used to
estimate how much cash from
farm and nonfarm income was
available to cover production
expenses, the interest and prin
cipal on outstanding debt, and
family living needs. Researchers
divided farms into two cash flow
positions; negative and positive. A
negative cash flow alone is not
enough to signal severe financial
stress, Johnson says, because a
farm that has a strong net worth
position would probably be able to
weather agriculture’s current
economic crunch. How? By
temporarily leveraging some
assets. If assets are too heavily
leveraged, however, net worth
declines to dangerously low levels,
giving the operator little or nothing
to fall back on if cash flow is
already a problem.
Debt-to-asset ratios the most
owed to creditors as a percentage
of the value of the operator’s assets
were calculated from survey
responses. Using current prices,
input costs, and asset values,
researchers defined four
categories of debt-to-asset ratios:
0-to-39 percent, 40-to-70 percent, 71-
to-100 percent, and over 100 per
cent.
According to Johnson, farms
with ratios of 0-to-39 percent are in
strong net worth positions and
generally have few financial
problems. It’s the 40-percent mark
that’s the critical point, Johnson
says. “That’s when substantially
higher rates of return to farm
assets are necessary to maintain a
positive cash flow, or farmers
begin to have some difficulties.”
Farms in the next category of 40-
to-70 percent still have fairly
strong net worth positions. But,
unless they have a large, positive
cash flow, they will probably begin
having some difficulty meeting the
principal repayments on loans,
according to Johnson.
When debt-to-asset ratios fall
into the 71-to-100 percent category,
farms are likely to have trouble
meeting their current interest
payments as well as their principal
payments. For most of these
farmers, net worth is declining,
Johnson says.
And when debt-to-asset ratios
exceed 100 percent, he continues,
the farm is considered technically
insolvent. “The sale of all the
farm’s assets would not be suf
ficient to pay off its debts. ”
In which categories do most
American farms fall?
The majority 88 percent of
those covered by the survey
remained financially sound. Their
debt-to-asset ratios were in the 0-
to-39 percent range or they showed
positive cash flow. This is en
couraging news, Johnson says, in
view of the varied problems facing
agriculture in recent years
depressed commodity prices,
dwindling farm exports, and
plummeting farmland values.
These factors, however, have
taken a harsh toll on some
operations, he adds, pointing to the
flip side of the survey’s results.
Three percent or 51,000 of the 1.7
million farms were technically
insolvent.
Most of the farmers who faced
some degree of financial problems
fell somewhere in between.
Fanners in Between
The survey found about 196,000
farms (11.6 percednt of the 1.7
million farms) with debt-to-asset
ratios of 40-to-70 percent. Another
72,000 farms (4.2 percent) had
debt-to-asset ratios of 71-100
percent.
Again, Johnson points out, a
large debt-to-asset ratio alone does
not necessarily mean that a farm
is in financial distress. He ex
plains:
“Farms that have less than
$40,000 in sales usually earn a large
share of total income from non
farm sources, and often qualify for
and repay their loans on the basis
of this income. Very large Harms
with sales of over $500,000 tend to
be highly specialized and typically
can carry relatively high debt-to
asset ratios because of their
positive cash flow positions.”
On the other hand, it’s a sure
sign of trouble when cash flow is
low and debt levels are high,
Johnson says. These are the farms
researchers consider financially
stressed, and this was the case for
about 214,000 farms. All of these
farms had negative cash flow and
debt-to-asset ratios of 40 percenter
more.
Certain types of farms in certain
regions were most affected,
Johnson says. Cash grain, general
livestock, and dairy farms ac
counted for more than three
fourths of the 214,000 financially
stressed farms.
And several geographical with a national decline of 12 per
regions were also most affected, cent. When a farmer leverages his
Sixty percent of the financially or her land to borrow operating
stressed farms were concentrated capital, the land declines in value,
in the Corn Belt, Lake states, and the net worth position also drops,
Northern Plains. A contributing Johnson says.
New study will test current status
WASHINGTON - A lot of
farms started 1985 with
financial troubles. And
developments since then
still lower crop prices,
declining exports, and further
drops in farmland values
have not helped matters for
many farmers. Exactly how
much worse has farming’s
financial situation gotten
during the year?
USDA analysts are going to
try and find out with the 1985
Farm Costs and Returns
Survey. But they’ll need the
help of farmers. Here are
some details on the survey:
• If your farm is chosen by
USDA’s random sampling
procedures, you’ll be con
tacted by an interviewer to set
up a convenient time to visit
your farm. Interviews will
take about an hour.
• Participation is voluntary,
but remember that each farm
represents many other similar
operations. ‘For each farm
selected, no one else can take
its place.
• If you’re chosen to par
ticipate, you’ll receive a
notification by mail in early
January. Interviews will be
conducted between mid-
February and early March.
“The response rate to the
1984 survey was tremendous,”
says economist Jim Johnson
of the Agriculture Depart
ment’s Economic Research
Service. “That’s why the
results were so revealing,”
But the next survey may
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factor to this concentration is the
steep drop in farmland values in
those regions down more than 20
percent in 1984 alone, compared
actually be more important to
the nation’s farmers and
ranchers than last year’s
survey, according to Johnson,
because with the ongoing
collection of data, “we’ll be
able to make a comparison, to
see how the problems have
changed. We’ll know what’s
getting better and what’s
getting worse.”
The 1985 survey will t be
almost identical to the one
farmers and ranchers an
swered about 1984 income,
receipts, expenses, debts, and
assets. And, just as they were
last year, all answers are
completely confidential, says
USDA. After questionnaire
data (without names) are fed
into a computer, the
questionnaires are destroyed
so there is no record of any
individual’s answers.
Questionnaires are not sent on
to USDA in Washington, nor
are they shared with any other
government agency.
Again, Johnson stresses the
importance of the survey. It’s
the only way policymakers,
farm groups, and the public
can be accurately informed of
how changing regulations,
input costs, returns, and
technology affect the
agricultural economy, he
says.
“The last survey provided
the foundation,” Johnson
adds. “The next one will help
us better understand the
magnitude of financial
problems in the farm sector.”
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