What is your relationship with your lender? There are undoubtedly a few lenders putting pressure on farmers for repayment of debt, but there are probably more lenders who are out looking for business. Debt is being repaid and purchases are being made with cash. There may be a lot of lenders calling this winter and inviting farmers out to lunch to just renew their acquaintance. Its nice to be on the other side, isn’t it!

USDA’s recent comprehensive financial analysis of agriculture points to a more solid financial position for most operations, underpinned by rising land values and reduced need for loans. A 12.3% increase in the value of farm assets is anticipated for 2007. That is a function of a 13.7% increase in assets such as land and buildings. Equity held by farmers has risen nearly 55% in 5 years because asset values exceeds the debt on them, and total net worth is expected to jump from $1.8 trillion in 2006 to $2.0 trillion at the end of 2007.

On the books at the end of the year were grain inventories, which grew about 21% from last year, livestock inventory which fell slightly in value, and machinery inventory which grew $3.4 billion from increased purchases. Farmland and building values were up more than 13% in 2006, and climbed about the same amount in the past year. Part of the upward pressure is driven by recreation and non-farm development, particularly around urban areas, and ironically has not been slowed by the sluggish housing industry.

Even though many farmers are paying down debt, more debt is being taken on, and USDA estimates farm sector debt reaching a new record for the fourth consecutive year, peaking at $215.2 billion by the end of the year. Real estate debt is up 4.6% and non-real estate debt is up 2.8%. Such a trend is attributed to the optimism in farm country that strong markets will continue and expansion is being financed with debt. Mortgage debt was up 7% in 2006 and will be up 5% more in 2007. Lenders look at the cash flow potential and have found sufficient reasons to underwrite the loans by looking at commodity prices. Suppliers of inputs are also agreeing to provide financing at increasing rates.

Even though debt has increased, USDA estimates that only 11% of assets were financed with debt going into 2007. The national trend in the debt to asset ratio has dropped from 13.6% in 2002 and should be under 10% by the end of 2007. More than 60% of farming operations were debt-free. Even though real estate debt was climbing and helped liabilities rise 18%, the asset values rose more rapidly than debt levels. Commercial farms averaged a 5.1% return on assets, 4.6% return on equity, and a 16.4% higher operating profit margin than other farms. Cornbelt farmers had the highest debt to asset ratio, the highest return on assets, and nearly had the highest return on equity.

Along with the improved performance is the capacity to repay debt, and USDA says, “Operators’ maximum feasible farm debt and their unused repayment capacity are both expected to rise to their third-highest levels since 1970.” Capacity to repay debt was the greatest for:
1) farms with higher sales
2) Dairy operations
3) Farms in the northern Great Plains

Summary:
The financial picture is bright for agriculture from the perspective of diminished debt hanging over individual operations. With more than 60% debt free, and a near record high capacity for repayment of debt for farms, many operators are making expansion decisions that are coming easier. Debt to asset ratios are lower, with many farmers using additional income to pay down debt. However, total debt is rising because of expansion, and lenders are willing to underwrite the debt based on rising values of assets and rising cash flow statements.