• TABLE OF CONTENTS
HIDE
 Front Cover
 Abstract
 Table of Contents
 List of Tables
 Objectives and justification
 Agricultural financial trends in...
 Farm structure and structural changes...
 Farm receipts and expenses
 The farm balance sheets and...
 Conclusion
 Bibliography














Group Title: Economic information report
Title: Trends in agricultural finance in the USA and their significance in the 1980s
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Permanent Link: http://ufdc.ufl.edu/UF00026511/00001
 Material Information
Title: Trends in agricultural finance in the USA and their significance in the 1980s
Series Title: Economic information report
Physical Description: iv, 40, 2 p. : ; 28 cm.
Language: English
Creator: Van Blokland, P. J
Publisher: Food and Resource Economics Dept., Cooperative Extension Service
Food & Resource Economics Dept., Cooperative Extension Service, Institute of Food and Agricultural Sciences, University of Florida
Place of Publication: Gainesville
Publication Date: 1982
Copyright Date: 1982
 Subjects
Subject: Agriculture -- Economic aspects   ( lcsh )
Agriculture -- Accounting   ( lcsh )
Genre: bibliography   ( marcgt )
non-fiction   ( marcgt )
 Notes
Bibliography: Bibliography: p. 42
Statement of Responsibility: P.J. van Blokland.
General Note: Cover title.
General Note: "August 1982."
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Bibliographic ID: UF00026511
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Holding Location: University of Florida
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Resource Identifier: notis - AHF9911
alephbibnum - 001546381
oclc - 10095251

Table of Contents
    Front Cover
        Front Cover
    Abstract
        Page i
    Table of Contents
        Page ii
    List of Tables
        Page iii
        Page iv
    Objectives and justification
        Page 1
        Page 2
        Page 3
        Page 4
    Agricultural financial trends in the United States
        Page 5
        Page 6
        Page 7
        Page 8
        Page 9
        Page 10
        Page 11
    Farm structure and structural changes in U.S. farms
        Page 12
        Page 13
        Page 14
        Page 15
        Page 16
        Page 17
        Page 18
        Page 19
        Page 20
        Page 21
    Farm receipts and expenses
        Page 22
        Page 23
        Page 24
        Page 25
        Page 26
    The farm balance sheets and liquidity
        Page 27
        Page 28
        Page 29
        Page 30
        Page 31
        Page 32
        Page 33
        Page 34
        Page 35
        Page 36
        Page 37
    Conclusion
        Page 38
        Page 39
        Page 40
    Bibliography
        Page 41
Full Text

P.J. van Blokland Economic Information
Report 166



Trends in Agricultural Finance
in the USA
and Their Significance in the 1980s






HUME LIBRARY
MAY 10 1983
I.F.A.S.- Univ. of Florida











Food & Resource Economics Department
Cooperative Extension Service
Institute of Food and Agricultural Sciences ugust 1982
University of Florida, Gainesville 32611
















ABSTRACT


This paper attempts to summarize some agricultural financial trends
in the U.S. and analyze these trends using a new farm classification.
The presentation starts with a survey of farm debt, and in the following
discussion on farm structure, suggests a more useful structural classi-
fication. This classification is then used in an analysis of farm
receipts and expenses, followed by an examination of the farm balance
sheets and liquidity consequences. It is recommended that farms be
analyzed financially and with policy issues using the proposed four
farm type classification rather than the existing U.S.D.A. nine class
system.



Key words: Financial trends, ratios, debt structural classification,
income, balance sheets, liquidity, net worth.


























i















TABLE OF CONTENTS


Chapter Page

ABSTRACT ................... .... ....... ......... i

TABLE OF CONTENTS ............,....................... ii

LIST OF TABLES ...................................... iii

I OBJECTIVES AND JUSTIFICATION ....... ................ 1
Objectives ............ .. ................. 1
Justification ................................ 1

II AGRICULTURAL FINANCIAL TRENDS IN THE UNITED STATES ., 5,
Total Debt Trends .............. ..... 5
Farm Real Estate Debt .....-............ ......... 7
Farm Non-real Estate Debt .................... 9
Comments ................. ... ...............,, 11

III FARM STRUCTURE AND STRUCTURAL CHANGES IN U.S. FARMS ... 12
Introduction ....... ........ ........... 12
Farm Size Trends ...........................,,,. 13
A New Farm Classification ....................... 15

IV FARM RECEIPTS AND EXPENSES .................... .. 22
Gross Farm Income ............................... 22
Production Expenses ..,.......... ............... 23
Net Farm Income ............... .... ... ..... ,, 25

V THE FARM BALANCE SHEET AND LIQUIDITY ..,............... 27
Assets, Debt and Equity ...............27
Liquidity .................... ............... ... 31

VI CONCLUDING REMARKS ................................... 38

BIBLIOGRAPHY ....................... ... .......... 41








ii














LIST OF TABLES


Table Page

1 Price variation of selected commodities, 1980 ......... 3

2 Total agricultural debt outstanding in the United
States by financial institution, in dollars and
percentage terms (selected years) ...,................ 6

3 Total farm real estate debt outstanding in the
United States by financial institution, in dollars
and percentage terms (selected years) ................. 8

4 Total farm non-real estate debt outstanding in the
United States by financial institution, in dollars-
and percentage terms (selected years) .....,........... 10

5 Number of farms in the United States, classified by
sales class in terms of gross sales per year
(selected years) .,................ ........ ....... 14

6 Some salient financial statistics of U.S. farms under
a new classification, expressed as a percentage of
total farms (1972, 1977, 1980) .................. ..... 16

7 Shares of gross farm income by farm size
(selected years) ...................................... 22

8 Shares of production expenses by farm size
(selected years) .................. ...........,..... 24

9 Shares of net farm income by farm size
(selected years) ..................................... 25

10 Debt to asset and debt to equity ratio by farm
size (selected years) ........ ............... ..... .. 29

11 Real estate as a percentage of total assets and
total debts by farm size (selected years) .......,,,. 30

12 Ratio of total debt to cash receipts by farm size,
expressed as a percentage (selected years) ,......... 33

13 Total debt as a proportion of net farm income by
farm size, expressed as a percentage (selected years). ,.34

iii














LIST OF TABLES (Continued)


Table Page

14 Ratio of production expenses over gross farm
income (PE/GFI) and production expenses over net
farm income (PE/NFI) by farm size, expressed as
a percentage (selected years) .......................... 36

15 Ratio of net farm income over total assets (NFI/TA)
and net farm income over equity (NFI/E) by farm
size, expressed in cents per $1 (selected years) ........39





























tv














TRENDS IN AGRICULTURAL FINANCE IN THE USA AND
THEIR SIGNIFICANCE IN THE 1980S


P. J. van Blokland


Section I


OBJECTIVES AND JUSTIFICATION


Objectives

The objectives of this report are:

(1) To assemble the more recent agri-financial statistics in
one compact package.

(2) To see what trends are shown by these statistics during
the 1970s compared with earlier years.

(3) To analyze and interpret these trends to show how they
may affect farm structure and farm family income in the
1980s.

Justification

There are many publications which list a plethora of agricultural
statistics on debt, income and farms. Yet these publications rarely
offer much analysis. This report essentially attempts two things.
One, to present some salient figures in a rather more digestible form.
Two, to analyze the more obvious trends shown by the statistics in
order to see their effects for U.S. farmers in the 1980s.

The underlying reasoning behind this approach is that the early
1970s was a watershed for farming in much the same fashion of the
golden age of agriculture at the end of World War I, or the Great


P. J. van BLOKLAND is an associate professor of food and resource
economics.








2


Depression a decade or so later. The essential difference between
the early 1970s and the latter two occurences is that few people have
realized the significance of this latest watershed. But since its
occurrence, U.S. farming has faced entirely unique phenomena.

The watershed was largely triggered by two world events. These
were the world food crisis and the formation and subsequent actions
of the Organization of Petroleum Exporting Countries, or OPEC. Both
events, plus perhaps the winding down of the Vietnam War, pressured
the U.S. into realizing that it really depended on, and was affected
by, the rest of the world. And it brought home the fact that farmers'
income depends more and more on farm exports. Exports of agricultural
products typically ran at about $6 billion during the mid 1960s up to
the 1972/73 watershed. By 1976 exports had increased to nearly $22
bil-lion, strongly encouraged by the world food crisis and forecasts
for 1981/82 suggest around $45 billion per annum [5]. Farmers' income
is strongly linked to high exports and the Carter administration's
grain embargo to the U.S.S.R. brought this fact home to the American
public.

Both the world food crisis and OPEC have encouraged two phenomena
that farmers have not previously experienced. The first is semi-
permanent inflation with all its ramifications, including appreciating
land values and consequent liquidity problems, high interest rates and
steadily escalating costs. Real estate is now about 75% of a farmer's
assets compared with around 65% in the mid 1960s [4]. He is more asset
rich and cash poor than ever before. Interest costs in 1980 were
about $1 billion more than the $20 billion national net farm income,
compared to $2.2 billion interest costs in 1965 when net farm income
was $13 billion [1,8]. Farm production expenses have likewise esca-
lated, from $10 billion or 70% of gross farm income in 1965, to $51
billion or over 80% of gross farm income by 1979 [7].

The second phenomenon is the enormous increase in price varia-
ability, stemming largely from the growing importance of exports, with
its consequent effect on total revenue and hence on net farm income.
Whereas it was rare to have a commodity price change that was much
more than 20% during the growing season prior to the early 1970s,







3


this sort of change is now normal and an 80% price change is not
unusual. For instance, wheat prices in Chicago varied from $1.25 and
$1.82 between 1965 and 1971, and from $2.23 to $4.59 between 1972 and
1978. During these same years corn varied between $1.08 and $1.24 com-
pared with $1.57 to $3.02. Soybeans perhaps show the extremes. Before
1972 prices ranged from $2.56 to $3.10 (1967-1971) and since that date
have twice reached $12, from a 1975 low of $4.65. Table 1 emphasizes
the seasonal situation.

Table l.--Price variation of selected commodities, 1980


Commodity Unit High ($) Low ($) %Variation

Corn bu. 3.96 2.56 55

Soybeans bu. 9.56 5.69 68

Wheat bu. 5.44 3.80 43

Cotton lb. 0.75 0.58 29

Cattle lb. 0.75 0.58 29

Hogs Ib. 0.53 0.27 96

Source: Adapted from [3, 9].

The point is that price variation is greater now than ever before.
Therefore, the effect on net farm income, when steadily escalating
costs are included in the calculation, is often devastating. Net
farm income varied from $12.3 billion to $14.6 billion during the
seven year period 1965 to 1971. Since then it has changed from $17.8
in 1977 to $33.3 in 1973, with 1979 at about $31 billion, 1980 approxi-
mately $20 billion, and 1981 around the same and 1982 forecast to be
$17 billion, all in current dollars [4, 9].

Hence, it becomes particularly important that these effects are
understood, as well as the lending institutions adaptations to these
effects through the highly competitive financial markets. Farmers
need to adapt to these effects. There is little sign that they have.
Their main problem is to leave their particular area of expertise,
namely production, an area which has carried them fairly successfully






4


through two centuries. Production is no longer sufficient. Farmers
are essentially facing problems which require good management rather
than good production. Good production is still important. But the
1980s will require good marketing and good financing as well. Nothing
short of a managerial revolution is necessary for farming in America.
The following agricultural financial trends are presented to illustrate
this requirement.















Section II


AGRICULTURAL FINANCIAL TRENDS IN THE UNITED STATES


Total Debt Trends [2]


The figures in Table 2 underline the tremendous growth in total
farm debt outstanding that has occurred in recent years. Total debt
today is fourteen times the 1950 level, seven times the 1960 level
and three and a quarter times the 1970 level. It has nearly doubled
since 1976, just four years ago. In the early 1970s the annual in-
crease was approximately 6%; in the mid 1970s it was 13% and by the
late 1970s the annual expansion became 23%.

Traditionally, the major source of debt finance on the farm has
been individuals. For example, individuals supplied over 75% of total
farm debt in the 1900s and stayed around 40% form the 1930s onwards.
This was true up to the early 1970s but this source eventually became
insufficient for farmers' needs and now individuals supply only 23%
of debt. Banks have tended to supply a little over a quarter of the
credit but have shown a steady decline in their contribution since the
mid 1970s and now also stand at 23%. The Farm Credit System has
picked up most of this slack. Its contribution has risen to three
times its 1950 proportion, and this share is half again as much as
it was in 1970. Life insurance companies which provided nearly as
much debt as the farm credit system in 1950, have fallen appreciably
since 1970 and now supply only 7% of the total. Perhaps much of
the state of farming in the 1970s can be eptiomized by the growth
in the Farmers' Home Administration (FmHA) shares in the total debt.
After remaining at 4% for many years, their proportion now stands at
12%, as the lender of last resort. Farmers are therefore having
considerable problems in meeting the credit requirements of commercial
lenders.

5




















Table 2.--Total agricultural debt outstanding in the United States by financial institution, in
"dollars and percentage terms (selected years) ($l)*

Coanercial Farm Life Farmers' Comrodity Individuals
Year Banks Credit Insurance Home Credit and Total
System Companies Administration Corporation Others
Dollars Percent Dollars Percent Dollars Percent Dollars Percent Dollars Percent Dollars Percent Dollars

1950 2981 24 1403 11 1172 9 548 4 1721 14 4628 37 12454
1960 6342 26 3786 15 2820 11 1074 4 1165 5 9588 39 24775
1965 9407 26 6089 17 4288 12 1929 5 1543 4 13548 37 36804
1970 13875 26 11384 22 5734 11 3065 6 2676 5 16293 31 53026
1972 16717 28 14195 24 5564 9 3389 6 2262 4 16987 29 59114
1974 22625 31 19062 .26 5965 8 3891 5 750 1 21845 30 74137
1976 26456 29 27073 30 6726 7 5141 6 358 0.5 25078 28 90832
1978 36647 27 40080 29 10478 8 10388 8 5243 4 33478 25 136315
1979 39558 25 48436 31 12165 8 15932 10 4500 3 36857 23 157449
1980 40087 23 56479 32 12928 7 20090 12 4367 3 40685 23 174636

*Percentages rounded off.







7


The most recent statistics available suggest these problems are
increasing [2]. By the third quarter of 1981 FmHA loans outstanding
had increased to $24.7 billion, or 23% more than the fourth quarter
of 1980. For comparison, total farm indebtedness, excluding indivi-
duals grew by about 10%, so FmHA is obviously getting more custom.


Farm Real Estate Debt [2,8]

The changes in real estate debt are, not surprisingly, as equally
dramatic as with total debt. As shown in Table 3, the increase since
1950 is 17 times, since 1970, three times, and has essentially doubled
since 1975. It is however, the change in the source proportions of
debt that outline the most interesting and perhaps significant trends.

The first major change is, of course, the decline in the indivi-
duals' contribution. It was over half of farm real estate debt in
the early 1930s, but as Table 3 shows, this proportion has declined
fairly consistently, and particularly since the mid 1970s.

The second major change concerns what is now the Federal Land
Bank, the real estate arm of tne Farm Credit System. When its precur-
sor started at the end of World War I its proportional contribution was
less than 1%. By the start of World War II, this share had risen to
30% but quickly fell after the war to around 15% in the mid 1950s.
Since then it has risen steadily, and really expanded during the
1970s from 23% to nearly 40% in 1980, taking up the decline in indi-
viduals' contributions, and to a somewhat lesser extent the bank and
life insurance company mortgage proportional declines.

Life insurance companies have held more farm mortgage debt than
banks since the mid 1920s. In :fact they also held more than the
Federal Land Bank between the late 1940s and 1960s. They have there-
fore been a major supplier of farm mortgages. Understandably, their
contribution fluctuates more than other institutions due to the
necessity to change portfolio shares in accordance with the economy,

Banks, in their turn, play a vital but less important role in
financing farm real estate. They have never contributed more than
16% of the total real estate debt (between the late 1940s and early


















Table 3.--Total real estate debt outstanding in the United States by financial Institution,
"in dollars and percentage terms (selected years) ($M)*

Commercial Federal Life Farmers' Individuals
Year Banks Land Insurance Home and Total
Banks .Companies Administration Others
Dollars Percent Dollars Percent Dollars Percent Dollars Percent Dollars Percent Dollars

1950 932 17 965 17 1172 21 202 4 2308 41 5579
1960 1523 13 2335 19 2820 23 676 6 4728 39 12082
1965 2417 13 3687 20 4288 23 1285 7 7218 38 18894
1970 3545 12 6671 23 5734 20 2280 8 10953 37 29183
1972 4218 13 7880 25 5564 17 2618 8 11927 37 32208
1974 5458 13 10901 26 5965 15 3013 7 15915 39 41253
1976 6296 12 15950 31 6726 13 3369 7 18728 37 S10)6
0o
1978 8467 12 24668 35 10478 15 4535 6 23058 32 71206
1979 8554 10 29725 36 12165 15 6934 8 25137 30 82516
1980 8546 9 36032 39 12928 14 8519 9 26695 29 92710

Percentages rounded off.











1950s) and have stayed around 12% since 1960. However, their drop
in proportion and in absolute dollars (the only case in all these
trends) in the last two years does indicate a marked lack of interest
in holding their share.

Finally, as indicated in the total debt trends, the FmHA has, after
a fairly steady period between the 1940s to 1960, increased its share,
particularly over the last few years. It has almost quadrupled dollar
debt since 1970, the largest of any contributor, except the Federal
Land Bank (which has grown over five times during the same time period).
It is interesting that the most recent statistics available show that
the FmHA had only increased its farm real estate debt marginally between
the end of 1980 and the third quarter of 1981. The $0.7 billion growth
represents a 6% increase, so the major expansion in total FmHA debt is
the little over $4 billion or 35% increase in non-real estate loans
during the nine month period. The figures in Table 4 detail these
changes by presenting a broader picture of farm non-real estate debt
in the country.


Farm Non-real Estate Debt [2,8]

These changes in debt are possibly no longer surprising by now.
Total non-real estate debt has grown eleven times since 1950, some
six and one-half times since 1960, over three times since 1970 and
more than doubled since 1976. In the last 30 years the Farm Credit
System, via its short term lending arm of the Production Credit
Associations (PCAs), has expanded its dollar lending nearly 50 times
or four times since 1970. The FmHA allocations grew thirty-three
times and fifteen times over these same two time periods. Both
these trends indicate the increased specialization of non-real estate
lending loans through the PCAs and the increasing difficulty in
farmers' obtaining commercial credit, as shown by the growth in FmHA
loans.

The main proportional changes are no less spectacular, though
perhaps could be somewhat predicted by now. Individuals, tradition-
ally the main source of non-real estate funds, at around 40% from the


















Table 4.--Total farm non-real estate debt outstanding in the United States by financial institution,
in dollars and percentage terms (selected years)($M)

Production Credit
Commercial A c n ndt Farmers' Individuals Commodity
r Commercial Association and
YearBanks Fede nt ate Home and Credit Total
Banks Federal Intermneriate Administration Others Corporation
Credit Banks
Dollars Percent Dollars Percent Dollars Percent Dollars Percent Dollars Percent Dollars

1950 2049 30 438 6 347 5 2320 34 1721 25 6875
1960 4819 38 1451 11 398 3 4860 38 1165 9 12693
1965 6990 39 2402 13 644 4 6330 35 1543 9 17909
1970 10330 43 4713 20 785 3 5340 22 2676 11 23843
1972 12498 46 6315 23 771 3 5060 19 2262 8 26906
1974 17167 52 8160 25 877 3 5930 18 750 2 32884
1976 20160 51 11124 28 1772 5 6350 16 358 1 39763 C
1978 28180 43 15412 24 5853 9 10420 16 5243 8 65108
1979 31004 41 18711 25 8998 12 11720 16 4500 6 74933
1980 31541 38 20447 25 11571 14 14000 17 4367 5 81926

FICB a minor contributor to this total, particularly in late years.











1940s through to the early 1960s, have now settled at around 16% of
the total. Banks, which increased their share steadily since the 1940s,
overtook individuals as the main source in the early 1960s and by the
mid 1970s provided over half the non-real estate debt. But even they
have cut back recently, falling to 38% in 1980.

The PCAs have of course shown the most dramatic change. From
around 5% in 1940 the PCA has almost consistently enlarged its propor-
tion to 25% of the total non-real estate debt today. The Commodity
Credit Corporation share as an indicator of farmers' satisfaction with
market prices for some crops, understandably fluctuates. It remained
over 15% for most of the 1940s and 1950s, was relatively unimportant
during the Earl Butz years and is now tending to reemerge as an impor-
tant contributor to non-real estate debt funds.

Comments


This brief outline on farm debt is presented to give some idea of
the more meaningful recent trends in agricultural debt, at least for
the farmer. It is more than probable that these trends have some
bearing on the structural changes that are occurring on U.S. farms.
Some farms simply find it easier to obtain debt capital than other
farms. These farms are usually those that are better managed and
these better managed farms tend to be larger than other farms. When
they obtain debt capital they also tend to expand farther, often
easing their way even further into financial markets and perhaps
exacerbating the problem of obtaining sufficient funds by the remaining
farms. It may therefore be useful to turn to a basic picture of farm
structural trends.















Section III


FARM STRUCTURE AND STRUCTURAL CHANGES IN U.S. FARMS

Introduction [4]

The more important trends in farm structure can be succinctly
summarized. Farm numbers are still falling, though not as dramatically
as in earlier years, and larger farms are increasing in number and in
their share of total farm revenue. The former trend has been fairly
continuous since the mid-1930s while the latter has essentially been
encouraged by the watershed of the early 1970s.

Despite the fact that the definition of a farm sometime changes
between censuses, farm numbers have fallen from their peak of 6.8
million in 1935 to around 2.4 million today, which is similar to the
number of farms in this country in the mid 1860s. And there is a
similar amount of land in farming today as in the peak years with a
little over 1 billion acres. Likewise, the amount of cropland is
approximately the same (370 million in 1935 and 360 million in 1979).

Although the percent of those who own their farm has increased
since the 1930s, from 46% in 1930 to 62% in the 1970s, the amount of
land represented by full ownership has fallen a little, from 37%
to 35% over this same time period. Tenants in both categories have
also fallen and are now around 12%. The main change has been in
part owners. Only 10% of farmers owned and rented part of their
farms in the 1930s. This proportion has risen steadily to some 30%
today. This trend is perhaps more apparent in part ownership of land.
Now over'half the land in farms is held by part owners compared with
less than a quarter in the 1930s.

Given this background it is interesting to see what has happened
to the different farm sizes over time, classifying farms in terms of

12






13


gross sales per year.


Farm Size Trends [4,5]

Some basic numerical trends are shown in Table 5 and emphasize
the growing dichotomy of farm sizes in terms of gross sales. They
therefore presage the gradual awareness that different standards are
needed to understand and examine these comparatively new farm sizes.
Financial facilities and analysts for one particular farm size group
cannot necessarily work for all groups, though this statement will
possibly become clearer as the discussion proceeds.

The U.S.D.A. now divides farms into nine different categories,
based on total gross farm sales per annum. (Table 5 only shows
six of these in detail.) Four of these nine categories include farms
which gross less than $20,000 per year, which means that these farms
are extremely small in terms of farm production. The farms which
supply the vast majority of agricultural products in this country,
those grossing more than $100,000 annually are unfortunately only
divided into two groups, those between $100,000 and $199,999 and
those with more than $200,000. It would be useful if the group of
farms selling more than $500,000 were regularly reported by U.S.D.A.
(There is apparently a possibility that this may occur.) However,
their concentration on the smaller farms in statistical reporting
is understandable. States draw some federal funds which depend
on the number of farms in that state. Therefore it is politically
expedient to define a farm to be as small as possible in order to
continue drawing these funds.

Consequently, these small categories represent the largest number
of farms. But these are the farms that are still declining in number.
Those farms selling less than $2500 worth of farm products per year
were nearly half of all the U.S. farms in 1960, were still 40% in
1970, but by 1980 accounted for only 21%. In fact, farms selling
less than $10,000 annually are still about 50% of the total farm
number in the country, though they were more than 75% in 1960.


















Table 5 --Number of farms in the United States, classified by sales class in terms of gross sales per year (selected years) [6]*

Year <10,000 % $10 0 ,000 $20,000 $40,000 $100,000 % $100,000** $200,000 % Number of
to $19,999 to $39,999 to $99,999 to $199,999 and up and up Farms

1960 3126 78 497 13 227 6 90 2 NA 23 <1 3963
1965 2451 73 464 14 280 8 125 4 NA 36 1 NA 3356
1970 1998 68 390 13 326 11 178 6 39 1 57 2 18 <1 2949
1972 1873 66 367 13 321 11 217 8 55 2 82 3 27 1 2860
1974 1657 59 329 12 328 12 331 12 100 4 150 6 50 2 2795
1976 1603 58 319 12 323 12 338 12 103 4 155 6 52 2 2718
1978 1281 53 297 12 294 12 348 14 138 6 216 9 78 3 2436
1979 1212 49 289 12 284 12 377 16 169 7 268 11 99 4 2630
1980 1193 49 288 12 282 12 383 16 177 7 282 11 105 4 2428

*May not add due to rounding.
** Includes following classes
$5,000-$9,999
$2,500-$4,999
<$2,500
*** Summation of the previous and following column






15


On the other hand, today's larger farms were virtually nonexistent
in 1960. Even by 1970 less than 2% of U.S. farms grossed over $100,000
per year. Then came the price increases of 1973, which by 1980 expanded
this group to around 12%. Undoubtedly some of this expansion can be
explained by these farm price increases during the decade, part of
which at least stemmed from the inflation resulting from increased
overseas demand. But the prime mover is more likely the sheer growth
in farm size, a definite acquisition of more productive inputs by
the more aggressive farmers in the country.

Between these two classifications of essentially large and small
farms lie all the remaining farms. They have changed little in pro-
portional shares during the decade, apart from the $40,000 to $99,999
category. How can all these classes be re-assembled in a more useful
manner, and at the same time still cope with the changing definitions
of a farm by Congress and the inflationary effects which constantly,
change borderline farms from one category to another? The answer
is in the following subsection.


A New Farm Classification [6]

The decision here is to put the less than $10,000 in gross annual
sales into a part time category; call farms between $10,000 and $39,999
small farms; those selling between $40,000 and $99,999 annually into a
small commercial category and finally term the over $100,000 group over a
commercial farm. How do these categories help? They help focus on
the very different sorts of farms that these four classes represent
(though this view may become clearer after discussion of off-farm
income shares). Consequently Table 6 attempts to group them accord-
ing to these categories.

Those farms below $10,000 obviously obtain most of their income
from off-farm sources. Between them they now .have 42% of total farm
operator income, which includes both on farm and off farm sources,
but more significantly only 2% of all the farm income earned tn the
U.S. in 1980. Practically, two-thirds of off-farm income coming to
farm families now goes to this group. Part time farms will always
play an important role in U.S. agriculture by providing and maintaining

















Table 6.--Some salient financial statistics of U.S. farms under a new classification for 1972, 1977
and 1980, all expressed as a percentage of the total farms [6, 7, 8]* (1972, 1977, 1980)

Item Part time farms' Small farms Small commercial Commercial fears
farms farms
<$10,000 $10,000-$39,999 $40,000-$99,999 >$100,000
sales/year sales/year sales/year sales/year

1972 1977 1980 1972 1977 1980 1972 1977 1980 1972 1977 1980 Percent
Farm numbers 63 56 49 27 24 24 8 13 16 2 7 11 100

Per farm
- Assets 27 23 17 35 22 17 20 24 23 18 31 44 100
- Debt 15 8 6 35 18 11 25 29 24 25 45 59 100
- Equity 30 25 18 35 24 19 19 23 23 16 29 40 100

- Gross receipts 12 6 4 30 17 9 22 24 19 36 54 68 100
- Total expenses 10 7 5 27 15 9 22 22 17 41 56 69 100
- Returns to operators 17 -6 -17 38 23 11 24 38 36 22 45 70 100
Farm operator income
- Total operator income 48 42 42 27 20 16 14 18 16 12 19 26 100
- Farm sources 17 5 2 38 23 14 24 33 30 22 38 54 100
- Off farm 75 69 63 17 18 17 5 7 8 3 6 10 100

*This table should be mainly read along the rows. For example, the part time farms had 63% of the total
farms in 1972, while the small time farms contributed 27%, the small commercial 8% and the commercial farm 2%,
making up 100% of the U.S. farms in 1972. (All figures are rounded off.)







17


some rural stability and solidarity. However, they must have easy
access to local off-farm jobs in order to survive. These farms will
probably continue to decline in numbers, but this decline should slow
appreciably in the near future. The slowdown will occur because
rewards from these farms come from satisfaction with rural life and
working with nature rather than expanding profits and there does seem
to be a growing interest by different sorts of people with full time
jobs who want country living. The debt to equity ratios on these
farms are much lower than for other groups. They have cash flows
coming primarily from off-farm sources and these flows are essential
for farm survival. Lenders need to understand this situation, parti-
cularly as Table 6 shows negative farm operator returns to these
farms over the last few years,
The essential point is that these farms should not be judged solely
on their financial performance. For example, in 1980 these 1.2 million
farms had some $2 billion of expenses more than receipts which looks a
lot but is only about $1,666 per farm. Given that these expenses
include imputed rent, taxes and depreciation, and that their average
income from off-farm sources was over $18,500, many of these hobby
farmers would believe the above loss to be a reasonable price to pay
for the intangible benefits of living on a farm. Thus their survival
hinges simply on obtaining and maintaining a satisfactory off-farm
job, which allows them to live in an agricultural environment, They
therefore cannot and should not be treated in the same manner as full
time farmers. To do so is naive, and also fundamentally distorts the
statistics purporting to present a typical average U.S. farm.

The second group, those between $.0,000 and $40,000 is not quite so
clear cut. The farm becomes increasingly important in achieving a
reasonable family income, though off-farm sources makeup well over
half of total income. Many of the farm operators would probably be
traditional, with perhaps 100 and 150 acres of mixed farming. Others
may be attempting to expand, but these may well be in the minority.
So, in general, both on and off-farm income flows are important for
their survival.






S18 -


This is the group that will probably show continued attrition,
though they have broadly held their proportion of farm numbers over
the last ten years. They are not sufficiently large to earn a
meaningful income from farming, and their farming probably takes too
much time for them to hold a full-time off-farm job. They are
caught between two stools, and this increasingly tenuous position
is reflected by their asset, debt and equity trends over the past
decade.

Firstly, as a proportion of total farm sector balance sheet sta-
tistics, this group has shown an asset decline from 35% of all farm
assets in 1972 to 17% by 1980, a debt decline from 35% to 11% and
equity falling from also 35% in 1972 to 19% of the total. Now all
this has occurred while their farm number proportion has only fallen
by 3%. Thus even though these farms are apparently as financially
secure now as they were at the beginning of the decade Cin that their
debt is comfortably shielded by equity), their relative importance
has declined considerably.

This relative decline is also illustrated by their share of gross
receipts. They had nearly one-third of total farm gross receipts in
the early 1970s, matched by over a quarter of the expenses and nearly
40% of operator returns. These respective shares have now changed
to 9%, 8% and 11%. Thus their future does appear less certain than
the other groups in this new classification.

Per farm figures reinforce this suggestion. Equity was approxi-
mately $125,000 in 1972 and increased to around $243,000 by 1980.
Farm income was $8,800 in 1972 and only $4,800 per farm by 1980,
Even 1977 with $6,900 per farm, showed a larger figure than today.
So despite a near doubling in equity, farm income has fallen con-
siderably over the past decade. Therefore, there is an increasing
reliance on off-farm income sources to achieve reasonable living
standards. Off-farm income now comprises 70% of their total income
compared with 50% in 1972 and 52% in 1977. It seems rather doubtful
that farming caniregain its previous importance with this group,

The third group embraces those farms with gross annual sales
between $40,000 and $99,999. This group has doubled its numerical






19

proportion from 8 tb 16% of all farms between 1972 and 1980. At
the same time it has virtually maintained its balance sheet shares,
improving equity somewhat and increased its operator return substan-
tially. Operator income has also expanded, most significantly from
farm sources. This group thus possibly contains the smallest viable
commercial farms feasible today.

In per farm terms, farm income alone is over $15,000, well over
twice that of the next smallest U.S.D.A. sales class. But even then,
the present figure is less than the nearly $19,000 level of 1972 and
$18,000 in 1977. So even this group remains vulnerable to the vagaries
of the economy. However, the main objective of this group of farmers
is primarily farming. They earned 80% of their total income from
farming in 1972 and 67% in 1980, with the figure typically over 75%
between 1977 and 1979.

This group therefore contains those farmers who are primarily
farmers. The previous two groups do not. This group will probably
try to expand farm size in order to move up to the next group, the
fully commercial category. At present this small commercial group
has those units which are the smallest possible for full time farming
and can therefore be judged more as an individual business. And
this is the first of the new proposed groups that can be treated in
this manner.

The fourth and final group contains the fully commercial farms,
or those that gross over $100,000 annually. It would be preferable
to have an additional group, namely those farms with over $500,000
gross sales but the available statistics are presently spotty.
However, farms of this scale will eventually be reported and perhaps
could be termed 'large commercial.' Given this possibility, it may be
as well at this stage to briefly outline just how large the farms
in the $100,000 class actually are.

These farms are, in fact, not particularly large. In terms of
today's prices, a farm grossing $200,000 annually, in say corn sales
at $3.00 per bushel and 100 bushels per acre yield, converts to
667 acres. This farm would be insufficient to fully occupy a farm
family, and would probably have machinery which could manage twice






20

as many acres. Or in terms of cattle, at say $60 per cwt, sold fat at
10 cwt, the farm is only carrying some 330 head, which is also not a
full-time job. While these scenarios are obviously simplistic, they
should make their point. The point is that the largest farm group
still contains many farms that could well be insufficient for full farm
family employment, given suitable resources. Even farms grossing
$500,000 may well involve only around 1,500 acres of row crops. These
are simply family farms and essentially small family businesses, and
not the sinister monopolies hinted at so often by sections of the
popular press.

Not surprisingly it is this group with over $100,000 in annual
gross sales that is increasingly dominating U.S. farming, This group
has about 10% of the farm numbers and supplies over 70% of the nation's
cash sales in agricultural products. In 1960 they were less than 1%
of farm numbers and provided only 17% of the annual sales, By 1970
their numbers had risen to 2% and they supplied around 33% of this
nation's gross annual farm sales. If this group is separated to
isolate the $200,000 and above group, then this $200,000 class now
provides half the sales from only 4% of the farms, and was not even
reported until 1969, when constituting 0.5% of farm numbers, they
provided 21% of the sales. Thus these size groups are a very
recent phenomenon.

They now have 44% of all farm assets compared with 18% in 1972,
and nearly 60% of farm debt as opposed to 25% in 1972. This debt
has been issued against 40% of all equity compared with 16% earlier.
They have nearly 70% of the nation's farm expenses and exactly 70%
of operator returns. Yet they achieve a little over one quarter of
total farm plus off-farm income. America's agricultural exports
rest almost exclusively with this group of 280,000 farms as does the
comparatively cheap food enjoyed by this nation. This group will
become increasingly dominant and important in the future, but still
strongly maintain its family farm orientation.

These, then, are the new suggested groups. Each group is clearly
separated from the other groups,.unlike the present U.S.D.A. classi-
fication. These new groups have rather different characteristics





21


and should be treated in terms of these differences, both in analysis,
credit assessment and policy. The following section will continue this
analysis by presenting some of the financial differences between the
groups in more detail.














Section IV


FARM RECEIPTS AND EXPENSES [4,6]


Given the previous background of farm debt, farm numbers and
structure by the new classification, it seems appropriate to turn to
a synopsis of gross farm income, firstly over time and secondly as
shares under this new classification.

Gross Farm Income [2,6,7] .

Gross farm income has essentially grown four times over the last
20 years, and now stands at a little over $150 billion. Between 1960
and 1970 it increased by 50%, from around $40 billion to $60 billion.
It then doubled between 1970 and 1977 before expanding a further 40%
by 1980. Thus this last decade looks ostensibly good in terms of gross
income.

It is, however, the shares between the farm sizes that are parti-
cularly interesting. The following table summarizes some of the
essential trends.

Table 7.--Shares of gross farm income by farm size, selected years(%).


Small
Small Commercial Commercial
Part time Farms Farms Farm Total
Farms ($10,000- ($40,000- (>$100,000
Year (<10,000 $39,999 $99,000- sales/yr)
sales/yr) sales/yr) sales/yr)

1960 31 38 15 16 100
1965 22 37 18 23 100
1970 15 32 21 32 100
1975- 9 19 25 47 100
1980 6 10 19 65 100

22






23

The figures speak for themselves. There has been an astonishing
change in structural shares in gross farm income over the last twenty
years. The part time farms have fallen from 31%, or twice as much
as the commercial, to 6% of all gross farm income as compared with 65%
for the commercial farms, In fact, the part time farm gross income in
actual dollars has actually fallen, from about $11 billion in 1960
to $10 billion in 1980. At the other end of the scaTe, the commercial
farms have increased their gross income from $6 billion in 1960 to
nearly $100 billion in 1980, some 70% of which comes from the $200,000
and over sales class. The small farm.category has also fallen dramati-
cally while the small commercial farms, while fluctuating a little over
this twenty year period, have essentially remained the same.

There have thus been some dramatic change's within these classes
which need to be realized and imbibed before talking aboutU,S. :farming
as some sort of collective whole. It is not. It is a set containing.
widely differing subsets of farm units with very different objectives
and with very different needs. Agricultural policy can no longer be
uniformly applied, simply because the audience is n'o longer uniform.

These opinions can also be seen, and hopefully added to by the same
sort of brief synopsis of production expenses.


Production Expenses [6,7,8]

Production expenses have risen from $26 billion to $130 billion
between 1960 and 1980. These expenses doubled from 1960 to 1972 and
more than doubled again between 1973 and 1980. They have risen faster
-in recent years than has gross farm income, particularly with a 30%
increase since 1978. But again, as Table 8 illustrates, it is the
size shares that show the more interesting facts.






24


Table 8.--Shares of production expenses by farm size (selected years)


Small
Part time Small Commercial Commercial
Farms Farms Farms Farm
Year (<$10,000 ($10,000- ($40,000- (>$100,000 Total
sales/yr) $39,999. $99,000- sales/vr)
ae/yr sales/yr) sales/yr sales/yr


1960 26 38 16 20 100
1965 18 35 19 28 100
1970 13 29 21 37 100
1975 8 17 23 52 100
1980 5 9 17 69 100

While these trends may now seem obvious they are still distinctly
noteworthy. In 1960 the part time and small farm groups received
nearly two-thirds of farm inputs while the largest farms got one-fifth.
A mere twenty years. later, this last group, with only 12% of the farm
numbers, took practically 70% of farm productive inputs while the
remaining three farm groups had less than one third. This change has
had obvious consequences for farm input suppliers, particularly in
rural towns. Their clientele has altered not only in number but in
type of inputs. The suppliers have either had to meet the demands
for larger machinery and sophisticated chemicals from their larger
farmers or go out of business. Many suppliers have taken the latter
course and have been replaced by fewer and larger farm stores.
There can be little doubt that these trends will continue, at least
as far as the large farm demands are concerned. However, there is room
for the more traditional farm store in some regions as part time farms
grow in popularity, (as they are apparently doing in parts of New
England, northern California, Oregon and Florida) and there are already
signs that they are. Yet obviously any change in the market place
depends largely on the available income which could generate a change.
Therefore it seems apropos to turn to net income trends.







A







25


Net Farm Income [6]

This discussion is concerned solely with the net income generated
from farming activities on the four farm groups and totally ignores any
off-farm income. Essentially net farm income from all farms has climbed
since 1960, but does not show the steady path apparent with gross farm
income and production expenses. During the whole decade of the 1960s,
total net farm income stayed between $11 billion and $14 billion, with
seven of these years around $11 billion.

This steady state was abruptly interrupted with the events of the
early 1970s. After two years of income between $13 billion and $14
billion in 1970 and 1971, income rose to $18;billion in 1972, $29
billion in 1973 and fell to $21 billion in 1975 and 1976, plummeted to
$17 billion in 1977 and after climbing to $27 billion again in 1979,
now stands around $22 billion. It is obvious that income fluctuations
are firstly relatively new phenomena for U.S. farmers, and secondly
that farmers will have to adjust to them. (What they must do is con-
centrate on marketing programmes and managerial skills much more than
they do, rather than spending all their time on production.)

Yet again, the changes in the respective shares are interesting.

Table 9.--Shares of net farm income by farm size (selected years)
1 (%)

Small
Part Time Small Commercial Commercial
Farms Farms Farms Farm
Year (<10,000 ($10,000- ($40,000- (>$100,000 Total
$e9 s 00" $99,000"
sales/yr) sae r sa es/r00 sales/yr)

1960 43 40 11 6 100
1965 32 42 16 10 100
1970 22 40 22 16 100
1975 13 23 30 34 100
1980 11 16 29 44 100

These figures do suggest that the market place for inputs may well
have changed due to the change in purchasing power from the respec-
tive groups. In 1960 small and part time farms had nearly 85% of the.



L






26


country's net farm income while the larger commercial farms had only
6%. Now these larger farms have 44% while the two smaller groups
only muster a little over a quarter. These are dramatic changes
especially when it is realized that the two commercial groups have
increased their share from around one-seventh to nearly three-quarters
in twenty years.

Given these trends it is not insignificant that the distribution
of government payments has also changed in a rather interesting fashion
over this same time period. The sums are comparatively small, ranging
from one-half billion dollars to nearly four billion dollars, with 13
years of expenditures of less than 3 billion dollars. Each year is
different and there are no discernible trends except that the farmers
received rather less direct government dollars' n the 1970s than they
did in the 1960s.

In 1960 the larger commercial farms obtained 4% of all these pay-
ments compared with 45% for the spare time farms. By 1970 the former,
received 14% and the latter 25%, with the bulk (40%) going to the
small farms. But in 1980 the commercial farms got 30% of the total,
the small commercial 33%, the small farms 25% and the part time farms
12%. These are interesting and somewhat puzzling changes showing a
definite trend towards the larger farms, though whether due to poli-
cies geared along these lines, to subtle lobbying or simple laissez-
faire views from U.S.D.A. it is difficult to say.

In this brief examination of farm receipts and expenses for each
of these four groups, it is apparent that there have been considerable
changes. Now farming connotes change almost by definition. However,
these changes are particularly dramatic in their quickness, especially
since the watershed of the early 1970s. It is not all certain that
these changes have been absorbed. They have certainly been experi-
enced by the farmers, the majority of whom are possibly unsure of
how they should be handled. The next section, in examining the farm
balance sheets, may provide some guidance.















Section V


THE FARM BALANCE SHEETS AND LIQUIDITY [6,7,8]


The preceding sections have indicated some of the more recent
ups and downs in U.S. farming. In general, the financial situation
is worsening, and this was the message intimated by these sections.
However, a cursory examination of the farm balance sheets would pri-
marily indicate that things have stayed much the same over the years.

Assets, Debt and Equity [6,8]

Two widely used indicators, the debt to asset ratio and the debt
to equity ratio show this apparent constancy. For example, the all
farms debt to asset ratio in 1965 was 15.8% and in 1980 was 16.3%.
In other words, 16.3% of the farm assets would be needed to cover
the present debt load. The comparable figure for 1940 was 18.9, falling
to 7.2 in the mid 1940s, and then showing a fairly steady climb to
around 16% by the mid 1960s.

Much the same situation is shown by the debt to equity ratio,
which shows the percentage of the farm's equity required to cover
existing debts. In 1965 it was 18.8%, and in 1981, 19.8%. The com-
parable figure for 1940 was 23.3%. So the all farm picture does look
pretty much the same.

This view is, however, much too simplistic. It ignores the basic
financial problem facing today's farmer, which is the uncertainty
of his cash flow. This problem will be examined a little later on,
but it should be noted now in order to appreciate the information
which follows. The constancy view also overlooks the different
effects that current trends are having on the varying farm size



27






28


categories. Any examination relying solely on averages must inevitably
make this mistake. Some of the more relevant figures are illustrated
in Table 10.

The most obvious trend is that both of the ratios are essentially
going down. This means that there are more assets and more equity
available to cover the growing debt. Thus ostensibly things look
fairly secure. But there are some appreciable differences between
the groups, in that the large farms have higher, and the small farms,
lower ratios. In fact the smallest group has practically only one-
third the ratio of the largest farms, signifying either their much
greater reluctance to get into debt or the impossibility of obtaining
it. Given this fact it is interesting to.see how the debt is shared
between real estate and non-real estate for the different size farms.

A summary of the more salient statistics is shown in the following
Table 11. The essential trends are firstly that real estate as a
percentage of total assets is increasing its share for all farm sizes
and that this trend largely took place between the early and late
1970s, Secondly that real estate debt as a percent of total debt is
also increasing for all except the smallest, and particularly so for
the small commercial group. It is Interesting however that the
commercial farms have a much smaller proportion of their total debt
in real estate than do the other farms.

Thus both the groups' similarities and differences are important,
The rising trend in the real estate/total asset ratio will increase
the already serious liquidity problems facing farmers, Perhaps the
long predicted fall back in farm land prices will both actually
occur (it may well be occurring already) and reduce this trend some-
what. But it is difficult to see very much slow-down in at least
the near future, exacerbating farmers' liquidity shortage even further.
The part time farms are particularly trapped, though it would be
expected that they would be in this position, vis-a-vis the other
groups.

The second part of the table presenting the real estate/total
debt ratio, does highlight the different challenges faced by the




















Table 10.--Debt to asset (D/A) and debt to equity (D/E) ratios by farm size (selected years) (%)


Year Part time Small Small Commercial Commercial All Farms
Farms Farms Farms Farms
(<$10,000 (110,000-$39,999 ($40,000-$99,999 (>$100,000
sales/year) sales/year) sales/year) sales/year)
D/A D/E D/A D/E 0/A D/E D/A D/E D/A 0/E

1970 10.0 11.1 17.8 21.6 21.4 27.1 24.6 32.7 16.8 20.2
1974 6.3 6.7 13.4 15.5 16.3 19.6 27.2 37.4 16.0 19.1
1978 8.0 8.7 15.8 18.8 20.9 26.3 20.0 25.0 17.0 29.5
1980 6.4 6.8 10.0 11.1 17.0 20.5 22.3 28.7 16.3 19.5
,o






* *<
















Table ll.--Real estate as a percentage of total assets and total debts by farm size (selected years)

Real estate as percent of total assets Real estate as percent of total debts
Small Small
Part time Small Commercial Commercial Part time Small Commercial Commercial
Farms. Farms Farms Farm Farms Farms Farms Farm
Year (<$10,000 ($10,000- ($40,000- (>$100,000 (<$10,000 ($10,000- ($40,000- (>$100,000
sales/yr) $39000 $99,000 99sales/r) sales/yr) $39,000 $99000 sa les/yr)
ssale/yr) sale/yr) saes/yrales/yr) sales/yr) sales/yr)

1970 71 67 68 67 66 57 58 39

1974 70 68 68 66 63 52 65 49
1978 82 76 76 77 61 59 63 40

1981 81 77 77 77 59 60 66 43
o






31


four types of farm. The commercial farms must obtain sufficient
capital for operating expenses, and it is to be expected that due to
their intensity, their costs of production per acre would be higher
than the less commercially oriented farms. So any additional capital
needed to finance land takes capital away from purchased productive
inputs. This real estate ratio should therefore remain low. On the
other side, the smaller farms rely on outside income for much of their
production expenses. Consequently, a somewhat higher ratio is not so
serious. The indication that the small commercial farm ratio has
risen so rapidly is cause for alarm. They may be severely pinched
in a credit crisis.


Liquidity [2,6,8]

This sub-section looks at the liquidity situation of the different
groups. The previous one implied that farmers are generally facing
increasing liquidity problems. Thus their essential financial pro-
blem is cash flow rather than asset oriented. The growing importance
of fixed or long term assets in farm investments is accentuating the
cash flow problem, as farm assets become proportionally more illiquid,
through real estate acquisitions and valuation changes.

It is probably fair to say that the increasing debt load is
largely caused by the need for a larger cash flow. Unfortunately,
real .estate is being increasingly used as collateral to finance
these short term loans. This trend ts increasing and is historically
rather unique. Thus some debt which is ostensibly real estate in
origin; is actually being used for non-real estate purposes, and
this situation inevitably clouds some of the statistics on real and
non-real estate debt.

Table 12 shows what has happened in terms of debt loans and
farm gross cash receipts. By 1969 the average farm had essentially
a one to one relationship, or for every $1 of cash receipts there
was $1 of debt outstanding. This relationship does not allow much
significant debt repayment. It improved up to 1974 when 874 of
every dollar of cash receipts could be earmarked for debt. But by





32

1980 this relationship had worsened considerably. Cash receipts were
insufficient to meet debt requirements. For every $1 of gross farm cash
receipts there was approximately $1.25 of debt.

There are, however, some significant differences between the four
major farm groups. All except the largest group show the same prepon-
derant easing through the early 1970s and then worsening rather markedly
during the late 1970s to 1980. But the degree of debt with respect to
cash receipts between the groups is vast. The part time farms have two
and a half times the ratio of the commercial farms. In 1980 for every
$1 of cash receipts the part time farms had over $2.50 of debt while the
large commercial had $1.03 of debt. The small commercial farms showed
approximately $1.70 and the small farms about $1.55 of debt for each $1
of cash received.

Thus the liquidity problems are different for the different farms,
The part time farms rely considerably on off-farm earnings to supply
their cash flow. Other tables have shown them pretty secure in balance
sheet terms. So as long as they are both willing and capable of finan-
cing their farms largely with off-farm earnings they will survive,

The small and small commercial farms are in a more sticky situation.
Obviously, off-farm earnings are still important for them, particularly
for the small farms. But they do rely on the farm for a major part
of their cash income, particularly the small commercial farms. Yet
the small farms' debt load compared with cash receipts has increased by
over two-thirds for the small farms, and has doubled for the small
commercial farms. -They both have potentially severe liquidity problems,
that perhaps are best offset by more off-farm income for the farmer,
and greater farm production and productivity for the latter group.

Finally, the commercial farms seem in a fairly satisfactory
position. Undoubtedly they would prefer to have a smaller ratio. But
their rapidly increasing debt loads shown previously have essentially
been offset in difficult times by a corresponding increase in cash
receipts. These are the truly commercial group, and the bastion of
American agriculture. Their future growth looks assured.





33


Table 12.--Ratio of total debt to cash receipts by farm size, expressed
as a percentage (selected years)

Small
Part time Small Commercial Commercial All Farms
Farms Farms Farms Farm
Year (<$10,000 ($10,000- ($40,000- (>$100,000
sales/yr) $39,999 $99,999 sales/yr)
sales/yr) sales/yr)

1969 150.3 160.5 100.7 73.6 100.9
1972 121.8 119.9 108.1 76,7 99.3
1974 150.9 90.4 78.1 83.4 87.1
1976 160.2 112.1 123.4 90.2 105,9
1978 198,9 127.2 140.3 98.5 115.6
1979 220.1 130.1 147.0 100.8 116.6
1980 253.6 154.5 168.8 102.7: 124.7

The slightly different perspective shown by Table 13, however,
adds a little to the above analysis. It shows debt as a proportion of
net farm income. (Net farm income is what remains after deducting all
fixed and variable costs from gross farm income.) For example, there
was $2.23 of debt for every $1 of net farm income oh the average farm
in the United States in 1960. This figure had tripled by 1980, with
the major expansion occurring in the late 1970s, with an additional
very large jump from 1979 to 1980.

Interestingly, the part time farms have consistently possessed the
smallest proportion of the four groups. Yet, this condition is not
really surprising considering the secure balance sheets of these farms,
and that their production expenses.represent a lower proportion of
gross farm income than the other farm groups. Again then, these
figures do emphasise the security of these farms, given only that
they can maintain a satisfactory off-farm income flow.

The small farms also look in a fairly good position. But this
would be a misleading view. They have to maintain major income flows
from both farm and off-farm sources. They are thus faced with the
dilemma of either attempting to increase their proportion of total
income from off-farm sources, or the proportion which comes from the






34


farm. In meeting this challenge they do show some declining balance
sheet performances. They are therefore in an unenviable position to
face the future.

Table 13.--Total debt as a proportion of net farm income by farm size,
expressed as a percentage (selected years)

Small
Part time Small Commercial Commercial All Farms
Farms Farms Farms Farm
Year (<$10,000 ($10,000- ($40,000- (>$100,000
sales/yr) $39,999 $99,999' sales/yr)
sales/hr) sales/yr)

1960 NA NA NA NA 2,23
1965 NA NA NA NA 3.10
1970 3.46 3.32 3.76 5,18 3,75
1972 2.78 3,50 3.31 3.50 3.32
1974 1.77 3,56 2.41 2.,62 2.67
1975 2.92 2.96 2,95 5.73 3,88
1977 5.04 4.23 4.23 9.49 5.89
1978 3.72 4.09 4.40 4,47 4.30
1979 3.72 4,25 4,51 5.00 4.64
1980 4.15 4.31 5.57 9.00 6.72


The small commercial farms seem at first glance to be in a worse
position. Yet, their task is much clearer than the previous group.
They have to improve their returns from farming and as commercial
farmers they have probably weathered the storms of the 1970s as well as
they could have hoped. The increase from $3.76 debt for every $1 of
net farm income to $5.57, while severe, is certainly not unmanageable,
given their balance sheet situation and that there was a remarkable
jump between 1979 and 1980.

This jump is much worse for the commercial farms, rising 80% in
one year, However, as shown by the time series of ratios of this
group, their completely commercial characteristic makes them much more
vulnerable to the risk of price fluctuations of their output than the
other groups which can lower their farm income risk through off-farm
earnings. Hence, it would be expected that this group has the widest
fluctuations of all the groups. For example, the ratio under review







35


changed from $2.62 to $9.49 between 1974 and 1977. So any one year
change for the worse is probably not too serious for long run
survival. Yet, trends are on the upswing and will have to be care-
fully watched.

The general liquidity problem is also well illustrated by expres-
sing net farm income as a percentage of gross farm income 19]. The
all farm figures stayed in the high 40s from the turn of the century
to around the end of World War II. In other words, nearly 50% of gross
farm income was net farm income, with fixed and variable costs obviously
making up the remainder. Thus the return to farmer management, farm
family labour and farmer capital was substantial. fNet farm income
shows what is remaining to pay for these three resources.)

Then the percentage started falling, eventually leveling off to the
mid to high 20s between 1965 and 1975. There was then a dramatic fall
which in 1980 leaves a percentage of 13.2 of gross farm income that
ends up as net farm income. Perhaps this figure emphasizes the real
cost price squeeze that farmers have experienced over the past few
years better than any other figure.

Again, not all farms are the same. Table 14 takes a slightly
different approach in a similar analysis, which looks at firstly
production expenses over gross farm income, (PE/GFI), and then pro-
duction expenses over net farm income, (PE/NFI), for the four main
farm groups. The part time farms portray the worst trends since 1960.
They have not generated sufficient sales to manage the growing produc-
tion expenses compared with their 61% performance in 1960, And as
their net as a proportion of gross has also fallen, they are also
losing a satisfactory level of net farm income. In 1960, for every
$1 of net farm income there was $1.57 of production expenses, but by
1980 this latter figure had more than doubled to $3.44.

The small farms have managed rather better. There has been only
a 5t change in the PE/GFI ratio during the vagaries of the last 20
years, though the PE/NFI relationship has grown from $2.50 to $3.17
for each $1 of net farm income. These figures are the lowest of the
four groups and perhaps illustrate their sincere attempt to stay
afloat.















Table 14.--Ratios of production expenses over nross farm income (PE /GFI) and production expenses over
net farm income (Pt/NFI) by farm size, expressed as a percentage (selected years)

Year Part time Small Small Commercial Commercial
Farms Farms Farms Farms
(<$10,000 ($10,000-$39,999 (S40,000-$99,999 (>$100,000
sales/year) sales/year) sales/year) sales/year)
PE/GFI PE/NFI PE/GFI PE/NFI PE/GFI PE/NFI PE/GFI PE/NFI

1960 0.61 1.57 0.71 2.50 0.78 3.50 0.88 7.67
1965 0.64 1.76 0.71 2.48 0.77 3.30 0.89 7.79
1970 0.67 2.06 0.69 2.27 0.75 3.06 0.87 6.99
1972 0.66 1.92 0.67 2.06 0.72 2.63 0.84 5.37
1974 0.67 2.07 0.67 2.00 0.68 2.11 0.78 3.51
1976 0.74 2.88 0.73 2.75 0.75 2.96 0.86 6.21
1978 0.72 2.58 0.70 2.38 0.73 2.64 0.86 5.90
1979 0.74 2.81 0.72 2.60 0.74 2.82 0.86 6.08
1980 0.78 3.44 0.76 3.17 0.78 3.49 0.90 9.34






37

The small commercial farms have, according to these statistics,
done even better. They have essentially remained stable over the last
two decades, and have values equivalent to the part time farms. So
it may be that these farms have fewer liquidity problems than may
have been assumed.

The commercial farms present much the same pattern as previously.
They fluctuate much more than other groups and consistently have
higher ratios due to their greater input intensity. However, the fact
that they now only generate $1 of net farm income for every $9.34 of
production expenses compared with $3.50 just a few years earlier, coupled
with their growing debt load with respect to net farm income ($9.00
for every $1 net) illustrates too that firstly most of their production
expenses are borrowed and secondly that they are now generating fewer
internal dollars to meet their farming requirements, It is hoped that
this situation will be temporary, as the statistics in this table
suggest it might be.















Section VI


CONCLUDING REMARKS

The balance sheet and liquidity presentations can be combined
somewhat in the following table which shows net farm income, firstly
over total assets and secondly over equity for all farms and for each
farm group. For example, in 1960, U.S, farms earned 5.5 cents for
every dollar of assets, and 6.2 cents for each dollar of equity or net
worth. There are some obvious similarities in that both ratios show
the same trend with the equity ratio understandably higher. Also,
that all groups show broadly declining ratios particularly over the
last three years.

The all farm statistics tend to mask what really happens. For
example, the part time farms have markedly lower ratios than the
others. We have already seen that they are comparatively asset rich
and generate little farm income. Therefore this pattern is not entirely
surprising. The small farm ratio is somewhat higher and has a lower
spread between the ratios than the top two farm sizes. The implica-
tion is that this growth does not or cannot generate comparable net
farm income from their equity given the asset level.

The small commercial farms are apparently making the best use of
their assets and equity, and the returns, while not entirely healthy,
are at least fairly steady and usually the highest of the four groups.
The commercial farms, fluctuate, as seen before, much more widely
than the other groups. They are perhaps the most capable of achieving
high returns in the good years and often bear the brunt of the effects
when reversal sets in.



38


















Table 15.--Ratio of net farm income over total assets (NFI/TA) and net farm income over equity
(NFI/E) by farm size, expressed in cents per $1 (selected years) [6, 8]

Yer Part time Small Small Commercial Commercial A
Year Farms Farms Farms Farms A Fa
(<$10,000 ($10,000-$39,999 ($40,000-$99,999 (>S100,000
sales/year) sales/year) sales/year) sales/year)
NFI/A NFI/E NFI/A NFI/E NFI/A NFI/E NFI/A NFI/E NFI/A NFI/E

1960 N NM NA NA 5.5 6.2
1965 NA NA N NA 5.0 5.9
1970 2.9 3.2 5.4 6.5 5.7 7.2 4.8 6.3 4.6 5.7
1974 3.5 3.7 3.7 4.2 6.6 7.9 10.1 13.8 6.0 7.1
1977 1.7 1.8 3.3 3.8 3.9 4.9 2.8 3.7 3.0 3.5
1978 2.1 2.3 3.9 4.6 4.8 6.0 4.5 5.6 4.0 4.8
1979 1.9 2.0 3.0 3.5 4.0 4.9 4.1 5.2 3.5 4.2
1980 1.5 1.6 2.3 2.6 3.1 3.7 2.5 3.2 2.2 2.6






40

In summary then, practically all farms in the country can be con-
sidered asset rich and cash poor. But cash flow is apparently a more
serious problem for the largest farms, especially as they obtain the
majority of their income stream from farming. The income stream for
the smaller farms comes essentially from off-farm sources. The larger
farms use proportionally more debt capital than do the smaller farms,
which rely far more on their fixed assets to obtain debt. These assets
may well contain a relatively large proportion of non-farm assets.
Finally, these larger farms need increasing productivity particularly
in net terms if they are to prosper. There is still a strong incentive
for them to get larger. On the other hand the small farms need steady
off-farm income sources for their continuing existence. Their farming
is probably not so important.

These four types of farms present the effects of recent agricultural
finance trends on U.S. farm structure more succinctly than the typical
U.S.D.A. 9 or 10 class groups. The four types emphasize the conflict
between farm and off-farm income for survival, and the difficulty
that the small farm group has in making this decision.

Changes in economic conditions will affect each type differently.
And any overall agricultural policy must appreciate the essential dif-
ferences between these groups. There is no overall farming panacea.
Each group is fundamentally different from the others and has its own
unique set of problems. Thus new policy thrusts should anticipate the
different effects they may have on these groups. Lenders should also
realize that they may well require different criteria in assessing
loan requests from these varying farms. This is why a new classifi-
cation was attempted.












BIBLIOGRAPHY



[1] Champaign National Bank. The Farm Picture. Champaign, IL:
The Bankvertising Co., 1982.

[2] Melichar, Emanuel et al. Agricultural Finance Databook:
(Monthly, Quarterly and Annual Series). Board of Governors
of The Federal Reserve System, Washington: various dates.

[3] Progressive Farmer (Southeast Edition), various dates, 1981.

[4] U.S. Dept. of Agr. Agricultural Statistics. Washington: U.S.
Govt. Printing Office, various dates.

[5] Handbook of Agricultural Charts. Washington: various dates.

[6] U.S. Economic Research Service. Economic Indicators of the Farm
Sectors. U.S. Dept. of Agr. Stat. Bull. No. 674. Washington:
various dates.

[7] Farm Income Statisitics.
Washington: various dates.

[8] U.S. Economics, Statistics and Cooperatives Service. Balance
Sheet of the Farming Sector. Washington: various dates.

[9] Wall Street Journal. various dates, 1982.
















This public document was promulgated at a cost of $295.91 or
30 per copy to provide lenders, policy makers and students with data
on basic financial trends.





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