Anyone who lived through the farm financial crisis in the 1980s can never forget it. My family managed to weather that storm but it definitely left a mark. The human cost of that crisis was very large within US agriculture. So, it was with great interest that I recently ran across this chart from the USDA showing that inflation-adjusted US farm debt was now back up to the peak levels of the 1980s farm financial crisis. This naturally raises the question of whether the seeds have been sown for another financial crisis.
The first point is that one cannot consider the growth in debt without considering the growth in assets, the other side of the balance sheet. The chart below shows that inflation-adjusted farm asset values are now about $4 trillion, which is around a trillion dollars higher than the late 1970s peak. As it has always been, the value of farmland represents the vast majority of farm assets. Consider that since 2006 farm assets have increased by $1.2 trillion while farm debt has only increased by about $200 billion. That is a cool TRILLION dollar cushion.
So, it should be no surprise that the farm sector debt-asset ratio has fallen at the same time that farm sector debt has risen. As the third chart shows, it now stands at 12.72%, near the low for the last 50 years. Here is an interesting thought experiment. How much of a decline in the value of farm sector assets would be required to drive the debt-asset ratio to 20%, near the peaks of the 1980s financial crisis? For this to happen, farm asset values would have to drop to around $2.6 trillion, or a decline of about 35% from present levels. This just does not seem very likely to me.
While I think the overall balance sheet strength of the US farm sector is strong, that does not mean that everything is rosy going forward. Interest rates have risen substantially due to the US Federal Reserve moving to a policy of fighting inflation. If interest rates remain near present levels, it will inevitably put some downward pressure on US farm asset values. This could be a problem for highly indebted farm operations, but the sector as a whole could absorb, say, a 10% decline in asset values without causing a major crisis. But we should still carefully monitor trends in farm asset values, namely the price of farmland, in this new interest rate environment.
This analysis suggests that the US agricultural sector is not likely to face a solvency crisis like in the 1980s in the near future. However, the recent rise in interest rates could drain liquidity from highly indebted farm operations at a rapid clip. We definitely should be on the lookout for debt repayment problems for this subset of farm operations. I am sure that ag bankers are already thinking about it.
The charts included in this post were prepared by the terrific farm income team at the Economic Research Service of the USDA. The original charts and data can be found here: USDA ERS – Assets, Debt, and Wealth