How much debt is too much?How much debt is too much?
While it’s too early to determine if debt use has increased too much in recent years, it will be critical to pay close attention to debt levels going forward in the agricultural sector.
August 20, 2017
The average rancher in the U.S. today is 58 years old, and less than 2% of the nation’s population is actively involved in production agriculture. This could be due, in part, to our increased efficiencies in producing more while using less, but I think it’s largely due to the increasing risks and capital required in order to get started in this business.
Simply stated, fewer of my generation are jumping into this industry with both feet. This business takes a great deal of discipline, time, labor and sacrifice in order to achieve success. For many, a job in town is a stable income that keeps pace with the rate of inflation and a family’s expected standard of living. With the ups and downs of commodity markets, volatility is expected in this industry, and families often have to adjust to get through lean times.
A recent article written by Brent Gloy for Agricultural Economic Insights explores ag sector debt levels.
According to Gloy, “Debt has always played a key role in the capital intensive U.S. agricultural system. At times, such as the farm crisis of the 1980s, too much debt has been problematic. However, most often it has been a useful tool that has allowed a massive substitution of capital for labor to take place.”
So, how much debt is too much? Have today’s modern food producers taken on more than they can handle?
Gloy says, “The Economic Research Service estimates that nominal farm debt in the U.S. totals $395 billion, with 61% of that debt real estate debt and the remaining 39% non-real estate debt.”
What’s more, he writes, “The inflation adjusted total amount of debt is now approaching the highest levels seen in the data. In 2009, the total debt is $17.8 billion under the peak. If debt were to increase 5% from current levels it will exceed the peak set in 1980. Second, real estate debt has exceeded non-real estate debt in every year of the data. Non-real estate debt nearly exceeded real estate debt for a period in the mid 1990s.”
For some, any form of debt is crippling and anxiety-inducing. For many farmers and ranchers, however, it’s a tool to be used to expand plus cash flow and operate a challenging business where often there is only one paycheck in a given year. It begs the question, are producers more or less likely to go in the hole in order to get ahead?
Gloy explains, “The data tend to suggest some rather long periods of increasing and decreasing debt use. For instance, starting in 1960, total debt use increased every year except 1968 and 1970 which saw very modest declines. Then, as the farm crisis began, debt use declined every year from 1981 to 1994. Since that time, debt use has increased every year except 2000, 2004, and 2012.”
So what is the takeaway from all of this? We know that total debt use in agriculture has increased significantly in recent years.
Gloy warns, “If total debt were to increase at last year’s rate of 3% per year, total debt would exceed its inflation adjusted peak in two more years. There are a variety of things that one should consider when looking at total debt use. Of course, debt use should always be considered relative to the income generation of the sector. The key question is whether cash flow available for debt use has kept pace with the increases in debt.
“The rapid increases in real estate debt indicate that farmers have aggressively leveraged farm real estate as farm incomes have declined. This makes closely monitoring the farmland market and farmland values even more important in the future.
“As we go forward, it will be critical to monitor financial conditions throughout these sectors and regions. It is certainly too early to say that debt use has increased too much, but it is also likely prudent to pay close attention to debt levels going forward.”
The opinions of Amanda Radke are not necessarily those of beefmagazine.com or Farm Progress.
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