farm real estate collateral: trends in debts, leverage, and

Farm Real Estate Collateral: Trends in Debts, Leverage, and Prospects for Future Income

Growth

Mitch Morehart*

Presentation to Farm Credit Administration Regulators Roundtable

February 2011

* The views expressed are the authors and do not necessarily reflect those of the Economic Research Service, USDA.

t t t

OutlineOutline

• Sector Forecast HighlightsSector Forecast Highlights • Farm business income prospects

F b i i d d b • Farm business equity and debt repayment • Real estate leverage position and

purchases • Farm real estate values versus earninggs

Morehart February 2011 2

Farm sector profitability improves in 2011

Nominal and inflation adjusted net farm income, 1970‐2011f 1/

$ billion $ billion 140

120

100100

80

6060

40

20

0 1970 1975 1980 1985 1990 1995 2000 2005 2010f

Nominal Real ((2005=100))

1/ The GDP chain-type price index is used to convert the current-dollar statistics to real (inflation adjusted) amounts (2005=100). Source: Economic Research Service, USDA. f = Forecast.


Production costs higher for 2011 $ illi$ Billion

Percent increase 2010f to 2011f

49 7 49.7 5% or higher

Less than 5% Feed

30.1

20.9

Labor

Seed

16.1 Fertilizer

Fuels

18.1

11.9 Interest

15.4 Repairs

16.6

P ti id Pesticides

4.7

Electricity

60.0

50 0 50.0

40.0

30.0

20.0

10.0

0.0

Source: Economic Research Service, USDA.


2011 real assets and equity to exceed 2007 peak values

Real farm sector assets, debt, and equity 1987-2011f 1/

$ billion (2005=100)

2,000

1,000

1,500

500

, Debt

Equity Assets

0 1987 1992 1997 2002 2007

1/ The GDP chain-type price index is used to convert current-dollar amounts to real (inflation adjusted) amounts (2005=100). Source: Economic Research Service, USDA. f = Forecast.


Farm Business Income Prospects

FARM BUSINESSES represented about 850,000 farms and accounted for 94 percent of production in 2009

Percent 90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

Farms Production Assets Debt

1,344,031

577,028

270 795 270,795

Rural Residence Intermediate Commercial

Small farms whose operators Small farms with sales less than Farms with sales greater than report they are retired or they had $250,000 whose operators report $250,000 and farms organized as a major occupation other than farming as their major occupation. nonfamily corporations or farming. cooperatives.

Source: 2009 Agricultural Resource Management Survey, USDA Farm Businesses


Receipts outpace cost increases leading to higher net cash income for most cropp farm businesses in 2011

Average net cash income for crop farm businesses 1/

2008 2009 2010f 2011f$ thousand 350

250

300

150

200

50

100

150

0

50

Cotton and rice Specialty crops Corn Mixed grain Soybeans and Wheat Other field crop peanutsf = Forecast.f Forecast.

1/The farm level forecasts are derived from partial budget modeling on the 2009 Agricultural Resource Management Survey (ARMS) using parameters from the sector forecasts. The model is static and therefore does not account for changes in crop rotation, weather, and other local production impacts that occurred after the base year.


Net cash incomes recede in 2011 for livestock farm businesses

Average net cash income for livestock farm businesses 1/ $ thousand

20082008 20092009 2010f2010f 2011f2011f

300

250

200

150

100

50

0

1/The farm level forecasts are derived from partial budget modeling on the 2009 Agricultural Resource Management Survey (ARMS) using parameters from the sector forecasts. The model is static and therefore does not account for changes in crop rotation, weather, and other local production impacts that occurred after the base year.

Hogs Dairy Poultry Beef cattle f = Forecast. 1/The farm level forecasts are derived from partial budget modeling on the 2009 Agricultural Resource Management Survey (ARMS) using


Regional disparity for farm business income prosppects in 2011 p

1/

1/ Th f l l f t d i d f ti l b d t d li th 2009 A i l l R M t S 1/ The farm level forecasts are derived from partial budget modeling on the 2009 Agriculttural Resource Management Survey (ARMS) using parameters from the sector forecasts. The model is static and therefore does not account for changes in crop rotation, weather, and other local production impacts that occurred after the base year.


Farm business equity and debt repayment

•Equity growth since 2007 for selected farm businesses

•Debt at risk comparison between 2002 and 2009 for farm businesses

•The outlook for debt repayment problems by production specialty


Farm business equity has stayed below 2007 levels for livestock and generally increased for most crop farms


Farm business debt repayment dashboard Estimated farm business debt at risk of non repayment, 1996-2009

Source: Agricultural Resource Management Survey (ARMS), USDA.


Farm businesses with DRCU > 120%, 2009-11F The share of farm businesses with potential debt repayment problems (DRCU > 120%) is forecast to decline for operations that specialize in cash grain operations that specialize in cash grain, soybean, cotton, and rice production; mirroring income prospects. Hog, poultry, and dairy farm business have had the highest percentage of farms with

C 120 2011 f DRCU > 120 percent. Thhe 2011 forecast shows improvement for hog and dairy farm businesses, relative to 2009.

Distribution of debt at risk by productionDistribution of debt at risk by production specialty, 2011F

According to 2009 ARMS data livestock farms held 55 percent According to 2009 ARMS data, livestock farms held 55 percent of total farm business debt at risk. This included large shares held by dairy farms (24 percent) and beef cattle farms (18 percent). Among crop farms, specialty crop farms accounted for 17 percent and corn farms followed with 14 percent of total d b k ( debt at risk (http://usda.mannlib.cornell.edu/usda/current/AIS/AIS‐12‐15‐

2010.pdf). The 2011 forecast is for the share of debt at risk to decline for dairy farms and increase for specialty crop and beef cattle farms.



http://usda.mannlib.cornell.edu/usda/current/AIS/AIS-12-15

t t t t

Real estate leverage position and purchases

•Comparison of real estate leverage position between 2002 and 2009

•Distribution of high real estate leverage farm business by economic class

Di ib i f hi h l l•Distribution of high real estate leverage farm business by production specialty

•Farm real estate purchases 2007-2009 by economiic cllass

•Farm real estate purchases 2007-2009 by operator age

•Amount of debt financing used to purchase farm real estate and leverage position


Fewer farm businesses had a high farm real estate leverage position in 2009 than in 2002

8.7% 14.0%


Percent Percent


‐ 9 56

‐

‐

‐

‐ ‐

15.16

32 82

Distribution of farm businesses with high real estate leverage position (above 70%) by sales class

100%

90%

80%

70%

60%60%

50%

40%

30%

20%

10%

0%

$500,000 $999,999

$1,000,000 or more 14.66

$1,000,000 or more 11.01

$250,000 $499,999 15.16

$250,000 $499,999 18.51

$500,000 $999,999 14.63

9.56

$100,000 $249,999 14.66

$100,000 $249,999 28.09

$99,999 or less 40.89 $99,999 or less

32.82

20092009 20022002



Distribution of farm businesses with high real estate leverage position (above 70%) by production specialty

Crop farm businesses Livestock farm businesses Percent Percent



Since 2007, roughly 50,000 farms per year have reported purchasing farm real estate with varying intensity by farm size

$99,999 or less $100,000‐$249,999 $250,000‐$499,999 $500,000‐$999,999 $1,000,000 or more Percent 70

50

60

30

40

10

20

0

Percent of farms buying farm real estate

Percent of farm real estate purchase





2007 2008 2009



The age distribution of farm operators purchasing farm real estate has also varied during the last three years

Less than 35 years 35 to 44 45 to 54 55 to 64 years 65 years or older Percent

40

35

30

2525

20

15

10

5

0

Percent of farms buying Percent of farm real Percent of farms buying Percent of farm real Percent of farms buying Percent of farm real farm real estate estate purchase farm real estate estate purchase farm real estate estate purchase

2007 2008 2009



In 2009, over half of farm real estate purchased was debt financed at 75 percent or more

tego

rystate leve

rage

cat

Real

es

Source: 2009 Agricultural Resource Management Survey (ARMS), USDA.


t t

t t

Farm real estate values versus earnings

•Capitalized value of cropland versus market value

•Farm real estate affordability (sector level)

•Capitalized value and affordability for l t dselected states

•Density map of capitalized value and affordability for select Midwestern states

•Factors besides urban density that explain imbalances

•LLong-term trendds


Cropland value divided by capitalized value 1 Cropland value divided by capitalized value 1

Ratio

2.5

2

1.5

1

0.5

0

Constant discount rate (6%)

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011f

1 Capitalized values are used to quantify impacts of both cash rent and interest rate changes on land values. A capitalized value represents the estimated discounted value of all future cash flows to farmland. Capitalized value = cash rent / interest rate on 10‐year note.


Current value of farm real estate versus maximum affordable value 1

$ billion 2,000

1,800

1,400

1,600

800

1,000

1,200

Actual real estate value

400

600

Real estate value that current income can cash flow, constant

200 Real estate value that current income can cash flow

interest rate (10%)

0 1970 1975 1980 1985 1990 1995 2000 2005 2010

1 In order to determine the maximum value of real estate that can be purchased from the adjusted net returns, we assume a loan term of 30 years and use average annual mortgage rates for this type of loan. This is then used to calculate the maximum real estate value that could be mortgaged based on agricultural production only.


,

Missouri Ohio Current value of farm real estate versus maximum Current value of farm real estate versus maximum affordable value affordable value

$thousand $thousand

80,000

70,000

60,000

50,000

40,000

30,000

20,000

10,000

0

60,000

50,000

40,000

30,000

20,000

10,000

0

1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006

Ratio

1.6

1.4

1.2

1

0.8

0.6

0.4

0.2

0

Ratio Cropland value divided by capitalized value ue divided by capit ed valueCropland val aliz 2 5 2.5

2

1.5

1

0.5

0

Cropland value divided by capitalized value

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 199819992000200120022003200420052006200720082009


o Cities with population of 50,000 or more

Market value / composite measure of agricultural value

Source: 2009 Agricultural Resource Management Survey (ARMS), USDA.


Market value > farm returns

Mineral rights Natural Amenities

Market value < farm returns

Technology driven acreage shifts


-

Rent-to-Value Ratios*, County Average from 1999-2008

Cities w/population > 50,000

0 001 - 0 015 0.001 0.015

0.016 - 0.030

0.031 - 0.040

0.041 - 0.060 *Ratio of per acre cash rent for cropland to per

0.061 - 0.120 acre value of cropland in the June Area Survey,

including both irrigated and non irrigated cropland including both irrigated and non-irrigated cropland 0.121 - 0.500

Morehart 27 February 2011

farm real estate collateral: trends in debts, leverage, and

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