Strength in farm real estate markets suggests that farmers do not believe that their incomes will decline precipitously in the future — a confidence based largely on government-provided emergency assistance, USDA economists say.
And farmers are being more cautious in taking on new debt, while at the same time lenders are more conservative in extending credit.
Economic Research Service economists Mitchell Morehart, James Ryan, and Robert Green, cite a report from bankers in the Chicago Federal Reserve District show that, despite a slowdown in the rate of increase in the last two quarters, land values in the district rose by 7 percent in the year ending Oct. 1, 2000.
“Such gains do not suggest that the past several years of relatively low commodity prices have made owners of farm assets pessimistic about the long term profitability of farming,” they said at the annual Agricultural Outlook Conference in Washington.
Although farm business debt is projected to rise 1.2 percent this year, it is down 50 percent from the 2.4 percent increase in 2000, and equity in 2001 is expected to rise about 1 percent as asset values increase relative to debt.
Government payments not only contribute to farm income, the analysts note, but also affect both assets and debts on the farm balance sheet. “Since payments contribute to farm incomes, they support farmland real estate values to the extent that the additional income is capitalized into the value of the land. Payments also provide funds to facilitate the purchase of machinery, equipment, livestock, and other farm production assets, reducing the need for debt financing of these purchases.”
And depending on the timing that farmers receive the payments, they can reduce their need for credit to meet seasonal production financing.
“More importantly, the generally countercyclical nature of government payments tends to stabilize income, minimizing the impact of catastrophic market losses and reducing the risk faced by both farm operators and the lenders providing them credit. In some instances, the additional funds from government payments can be used to pay down or eliminate existing debt.”
Debt repayment capacity utilization data suggest that farmers are placing greater reliance on available credit lines and the rise in this component “suggests that some farmers may have a more difficult time in 2001 meeting interest and principal payments on their debt. Government payments have provided many farmers with the resources to meet repayment obligations that could otherwise have presented severe cash flow problems.”
Farm real estate accounts for more than 75 percent of the value of all farm business assets, and its value is based primarily on the income it generates, the economists note. Non-operator landlords own about 45 percent of all farmland and, in some circumstances, are eligible to receive farm program payments (in 2000, they got about 12 percent of loan deficiency payments and 15 percent of all other direct government payments).
Government payments amounted to about 35 percent of net cash income for farmers in 2000 and about 31 percent of net cash income plus net rent to operator landlords.
Using capitalization rate formulas, the analysts say without government payments, farmland values would have been about 4 percent lower in the period 1972-1981, but about 25 percent lower for 1999-2001.
While new machinery purchases likely would have been lower in the absence of government payments, data indicate farmers have been rather conservative in using those payments to buy new equipment. Many farmers replacing machinery are choosing to do so with used equipment, as is evidenced by the lively market for well-maintained older tractors and combines at recent auctions throughout the Midwest.”
In USDA's baseline projections through 2010, government payments, “which will be an important source of farm income in 2001,” are projected to be considerably less in 2002 and beyond.
The impact of lower government payments on farm income and the ability to meet debt obligations will be hardest felt in 2002/2003, the analysts say. “Net cash income is expected to decline to $46 billion, as market receipts do not compensate for the decline in government payments.
“As cash receipts from farm commodities continue to expand on the strength of exports, government payments will become a less important component of farm income through the rest of the decade. By the end of the period, government payments should represent only 8 percent of the projected $65 billion net cash income, compared with 32 percent for 2000.”