As part of the Nothing Borrowed, Nothing Gained podcast season, several recent Weekly Insights articles have dug into trends in U.S. farm debt. Those articles have considered the overall debt situation, who lends to farmers, and the debt-to-asset ratio. This week we’re looking at the concentration of farm debt and repayment capacity.
Figure 1 takes advantage of the USDA segmentation of farms by sales class. More specifically, the chart plots the share of total farms (in blue) and the share of total debt (in orange) that each segment represents. For instance, in 2021, farms with less than $100,000 in sales accounted for 69% of farm businesses but only 11% of total farm sector debt.
The higher sales segments accounted for a smaller share of producers but a much larger share of the debt. Those with more than $1 million in sales account for just 7% of farms (nearly 76,000 of these operations), but they hold nearly half (49%) of the sector debt.
For those familiar with the 80-20 principle, the largest three segments (>$250k) collectively account for 22% of all farms and 80% of farm debt. This is to say that a small share of farm businesses hold a disproportionate share of the sector debt.
The concentration data raises questions about risk and the profile of farm debt. Rather than focusing on the total dollars of debt – or the debt-to-asset ratio – we can also consider the principal and interest burden of debt by economic class. For this, we’ve focused on the largest three classes of farms.
Figure 2 shows annual debt service obligations – principal plus interest payments – since 1996. It’s not entirely surprising that the largest farms – those with sales greater than $1 million – have the highest total annual payments. In 2021, the average debt payment for these farms reached $167,319. For the smaller operations, payments were considerably less.
Debt Repayment Capacity
Figure 3 takes the idea of debt burden and payments one step further. Specifically, the debt repayment capacity utilization (DRCU) ratio considers how much of a farm’s annual debt repayment capacity – which is based on earnings – is being utilized. A higher DRCU ratio means the annual payments consume a larger share of available income. A ratio that exceeds 1.0 implies the farm can’t meet all its obligations. Furthermore, a higher ratio makes farms more suspectable to income shocks.
Over time, the largest farms (>$1m in sales) have consistently had a lower DRCU ratio. In 2021, the DRCU hit 28% for the largest farms. For comparison, the DRCU ratio that year was higher for those with sales between $500k and $1m (DRCU at 42%) and $250k to $500k in sales (DRCU at 37%). This is to say that despite accounting for a large share of total debt (Figure 1) and having considerably higher annual payments (Figure 2), the repayment burden is not as burdensome as it may initially seem.
Wrapping It Up
A theme throughout this series of articles has been that data reporting on the health of the U.S. farm economy – from income to debts and assets – aggregate everything together as if the U.S. had one big farm. As Brent frequently reminds us, “The farm sector doesn’t repay its debt in aggregate.”
This week’s article highlights the importance of this from a few different perspectives. First, farm bankruptcies or loan delinquency data don’t provide any idea about the size of those entities. Debt concentration, meaning financial turmoil for the 1,000 largest farms, would affect the farm economy very differently than 1,000 of the smaller operations.
Finally, the farms with more than $1m in sales have the highest debt-to-asset ratio and annual payments, but that doesn’t mean they struggle the most to service that debt. How burdensome debt is can be measured in many ways, and it’s important to consider income measures.