The debt-to-asset ratio is perhaps the most watched financial metric of the U.S. farm economy. Undoubtedly, most of that attention can be traced, in infamy, back to the 1980s Farm Financial Crisis when the ratio peaked. This week’s post reviews debt-to-asset trends and some of the nuances.
Figure 1 shows the farm sector debt-to-asset ratio since 1960. Throughout most of the 1960s and 1970s, debts accounted for 17% of total assets. Conditions quickly changed, however, and the ratio peaked at 22% in 1985, coinciding with low farm income, declining farmland prices, and rising interest rates.
In time, total debts fell and the ratio stabilized at around 15% throughout the 1990s. In 2022 (13.1%) and 2023 (13.2%), the ratio is slightly above the average of observations since 2000 (13.0%).
It’s common to see this chart presented as evidence that all is well in the farm economy. While debt levels for the last 30 years have been nowhere near the conditions of the 1980s – or even throughout the 1960s and 1970s – this chart should also be a reminder that conditions can quickly change.
Debt Usage by Economic Class
Diving into the data at a bit more granular level, there are two demographic caveats to keep in mind. First, the debt-to-asset ratio varies significantly by farm economic class (Figure 2). Within the sub-groups, the debt-to-asset ratio is lowest for farms with lower sales. For example, the debt-to-asset ratio was 2.7% for farms with less than $100,000 in sales but considerably higher (13.4%) for farms with more than $1,000,000 in sales.
The second consideration is that not every farm uses debt (Figure 3). Only 23% of farms in 2021 had debt. The implications are that some farm assets are held by operations with no debt. In other words, Figure 1 doesn’t tell us how much leverage is utilized for operations using debt.
Figure 3 also reports the share of farms using debt by economic class. In 2021, only 16% of farms with less than $100,000 of sales had debt. As farm sales increase, a large share of farms use debt. For the largest economic class, those with more than $1,000,000 in sales, more than 60% of operations had debt.
Taken together, a large source of the difference in the debt-to-asset ratio by farm sales (Figure 2) comes from a difference in the share of farms that use – or do not use – debt.
Wrapping It Up
The debt-to-asset ratio can be an insightful measure of the overall health of the farm economy, but it’s not a perfect measure. First, it only considers the balance sheet and not how much income or cash flow is available for debt service. Second, the measure can quickly change, especially if farmland values abruptly decline as they did in the early 1980s.
Third, sector-level debt-to-asset measures can be noisy as many farms have no debt. While helpful in tracking the long-run trends, these national data are not a meaningful benchmark for producers to compare themselves against.
For those still curious, the USDA published an insightful chart on farms that are ‘highly leveraged’ (D/A ratio between 41% and 70%) and ‘very highly leveraged’ (D/A ratio >70%) (Figure 4, full article here). In 2019, nearly 10% of crop and 6.5% of livestock operations had significant debt levels. In general, these data also show ‘highly’ and ‘very highly leveraged operations are more common in crop operations. Lastly, there are fewer of these operations today compared to the 1990s and early 2000s.