When times are tough in agriculture, efforts to lower costs and improve cash flow often necessitate a cut, or delay, in capital expenditures. As expected, farm capital expenditures, after peaking in 2014, rapidly contracted as net farm income and commodity prices turned sharply lower. In this week’s post, we’ll review recently released data that reveals farm capital expenditures reversed course in 2017 and recently turned higher.
Farm Capital Expenditures
Figure 1 shows inflation-adjusted farm capital expenditures since 1960. These data exclude operator dwellings. As one might expect, farm capital expenditures peak during the farm economy booms and retreat during financial slow-downs. Since 1960, there were two up-turns; the late 1970s and from 2012 to 2014. During the earlier boom, farm capital expenditures peaked at $57 billion in 1979. To provide a historical context, the famous Big Bud 747 tractor was built in 1977.
Recently, expenditures peaked at a modest $47.7 billion in 2014. By 2016, however, farm capital expenditures fell $30 billion (-36%). While $30 billion in 2016 represented a sharp decline, it remained above levels observed throughout most of the 1990s and early 2000s.
The latest data from the USDA’s ERS shows farms increased capital expenditures in 2017. For 2017, expenditures were $35 billion, up 16%.
It’s worth noting the USDA current has an estimate for 2018. This is a very preliminary estimate. A sound figure for 2018 activity won’t come until August 2019.
Figure 1. Real (2018 USD) Total Farm Capital Expenditures (excludes operator dwellings), 1960 to 2018f. Data Source: USDA ERS.
Changes by Type
Two of the largest categories of farm capital expenditures are tractors and machinery. In 2017, these two categories ($9 billion for machinery and $7 billion for tractors) accounted for 53% of the total. Figure 2 shows how investments in these two categories have changed over time. Specifically, the data are indexed to the average from 2000 to 2002. This provides a measure for comparing how relative spending changed during the farm economy boom and slow down.
While both categories follow a similar trend, tractors have seen more relative change. During the boom, tractor expenditures reached an index value of nearly 250, or 150% increase over the base period values. Another way of thinking about this, each $1,000 in capital expenditures during the base period was equal to $2,500 during the peak.
Farm machinery, however, didn’t peak nearly as high. As tractors reached an index value of 250, machinery peaked at 200.
During the slow down, both have trended lower. In both cases, current index values remain above 100. This tells us current capital expenditures remain above the base period, in inflation-adjusted terms. Broadly speaking, however, tractors are relatively stronger in 2017 (index value of 179) than machinery (index value of 124).
Figure 2. Index of Select Farm Capital Expenditures (100 = 2000-2002). Tractors and Machinery, 2000 to 2017.
Relative to Income
A final way of considering capital expenditure data is relative to the value of farm production (Figure 3).
The first thing to consider is how different this measure is today compared to earlier years. During the 1960s, 1970s, and early 1980s capital expenditures were a much larger share of the value of farm production. These older data are not very meaningful for providing insights into the current environment.
More recently, capital expenditures relative to the value of farm production has average 8.2% since 1998. Interestingly, this measure hasn’t varied much over the last 20 years. Specifically, it has ranged from a low of 7.3% to a high of 9.5%. In 2016, this relationship was 7.3%, nearly a record low. In 2017, however, the ratio recovered to 8.3%.
Given the narrow window for this measure over time, and the forecast declines in farm income and the value of farm production in 2018, a decline in farm capital expenditures in 2018 seems likely.
Figure 3. Farm Capital Expenditures (Excluding Operator Dwellings) as a Percent of the Value of Farm Production, 1960-2018f.
Wrapping it Up
After a 36% decline in farm capital expenditures from 2014 to 2016, farm capital expenditures turned higher in 2017. This isn’t entirely surprising given an upturn in net farm income.
In recent years, the investment pattern across different capital items has not been uniform. Tractors and machinery, which account for more than 50% of investments, have followed a similar trend. However, tractor expenditures during the boom, and continuing during the slow-down, have been stronger than that of machinery.
Looking ahead, an expected decline in farm income for 2018 would suggest farmers are likely to, again, enact cost-savings and cash-flow improving measures. This could likely lead to a dip in farm capital expenditures in 2018.