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Agriculture
AN EIGHTH DISTRICT PERSPECTIVE
FALL 1986

Aggregate Farm Finances: Another Look
The nature of the farm financial problem can be stated simply:
farmers who assumed debt to purchase farmland at inflated values
are in financial trouble, and those who did not, are not. Because
farm debt expanded in the 1970s by the amount of asset
appreciation rather than at a rate consistent with the ability to repay
debt, the 27 percent average decline in farmland values since 1981
has precipitated a major restructuring of the farm sector’s balance
sheet. As one study at the University of M issouri has
demonstrated, many producers who financed current consumption
and offset operating losses by taking on additional debt against
inflated asset values are unable to repay their current debt load
even at zero interest.1 For these farmers, the only solution has
been, or will be, bankruptcy.
The financial stress of a relatively small share of farm
operations, however, has generated in some circles the impression
that the entire farm sector is unhealthy. For example, studies by
Wharton Econometrics and the Food and Agricultural Policy
Research Institute (FAPRI) have alleged that the sector’s financial
problems are so severe that they threaten the entire U.S. economy.
A careful analysis of the data, however, suggests that whatever
financial stress the sector faces is concentrated among a relatively
small share of farm operators. Moreover, it is clear that, even for
a worst-case scenario, the farm debt problem holds little
consequence for the aggregate economy.

Farm Financial Stress:
Some Common Misperceptions

farm operators related to their farm businesses. Also included is
the debt of individuals who have borrowed to purchase farm assets
but who are not engaged in farming (e.g., individuals who farmed
the tax code by purchasing and renting farmland) and the debt
of farmers held for non-farm purposes. When this debt, unrelated
to farm operations, is excluded from the total, farm sector debt
falls to $119 billion. It declines further, to $99 billion, when the
debt of “lifestyle” farms, those with less than $40,000 in annual
sales, is excluded. Limiting the discussion to only commercialsize farms with annual sales of at least $40,000 provides the
financial summary shown in the table on page 2. At the end of
1984, about 633,000 businesses were classified as commercial
farms and held $99 billion in debt.
Using the traditional criterion that farmers with debt-to-asset
ratios of 40 percent or less are experiencing no financial stress,
the data indicate that 69 percent (436,000) of commercial farms
were unstressed. These financially healthy operators owned 75
percent of commercial farm assets, held 36 percent of commercial
farm debt and had an average debt-to-asset ratio of 13 percent.
In dollar terms, farmers in this category had average assets valued
at $649,800 and debts of $83,900. In other words, the 69 percent
of commercial-size farms under little or no financial stress had
an average net worth of $570,250 at the end of 1984. In comparison
with the median U.S. household net worth of $39,000, these
farmers might be classified as quite wealthy businessmen.

The ‘Problem’ Farm Debt

Attempts to analyze the scope of the farm financial problem
The table also
can make a number of false starts. The two most
common distort the picture by including
individuals not really engaged in farming.
Typically, total farm debt has been cited as $212
billion as of December 31, 1984. This figure,
THE
however, includes much more than the debt of
FEDERAL
RESERVE
RAN K of
'Bruce Bullock, Farm Credit Situation: Implications for
ST. I D U S
Agricultural Policy, FAPRI
Columbia, March 1985.



M ,

University of Missouri-

shows that 5 percent of commercial farms, which
held $13.4 billion in debt, were technically
insolvent at the end of 1984. An additional 7
percent of farms, whose debt-to-asset ratios of
70 to 99 percent suggest a high probability of
bankruptcy in the near future, held about $16.2
billion in debt. Within the category of stressed
farm operators, then, it might be reasonable to
say that 12 percent (74,000) of commercial farms
holding $29.6 billion in debt have failed or are
likely to fail soon, while another 19 percent

FALL 1986

FEDERAL RESERVE BANK OF ST. LOUIS

Table 1
An Overview of the Commercial Farm Balance Sheet: Average Values of Debt and Assets by Sales Class and
Debt-to-Asset Ratios, 12/31/84 (dollar values are in thousands)
Debt-to-Asset Ratio
Average for
S a le s C la s s (th o u s a n d s )
$500 or m ore

$250-$499

$100-$249

$40-$99

0 -3 9 %

100% +

S a le s C la s s

2,536
1,181
1,461

2,3 9 2
1,517

665
2,104

15,850
435
823

6,340
550
680

566
411

298
969

4 0 -6 9 %

7 0 -9 9 %

6,340
990
1,905

N u m b e r o f fa rm s:
A v e ra g e deb t:
A ve ra g e assets:

19,654
$322
$ 2,316

N u m b e r of fa rm s:
A v e ra g e deb t:
A ve ra g e assets:

42 ,4 7 8
$ 185
$1 ,1 1 8

N u m b e r o f fa rm s:
A ve ra g e d e b t:
A ve ra g e assets:

152,794
$84
$638

4 8,184
268
507

16,484
345
431

10,778
356
257

155
577

N u m b e r of fa rm s:
A ve ra g e d e b t:
A v e ra g e assets:

221 ,2 6 6
$39
$390

5 1,988
150
281

18,386
199
234

13,948
198
145

75
351

-

SOURCE: Farm Debt, Government Payments, and Options to Relieve Financial Stress, GAO/RCED-86-126BR, March 1986.

(122,000) of farms, with debt-to-asset ratios between 40 and 69
percent and $34 billion in debt, have a significant probability of
failing. Without further analysis, these data imply a debt default
of between $13.4 and $63.6 billion and the loss of nearly 200,000
farmers, almost one-third of the total. But, even under some worstcase assumptions, there appears to be little likelihood that these
losses will unduly burden either farm production or aggregate
economic activity.
First, consider the dimensions of the bad debt. If it is assumed
that all commercial farms with debt-to-asset ratios greater than
40 percent eventually default on their debt, the write-off would
be about $64 billion. But, it is important to recall that the assets
pledged as collateral for the debt have some value so that the
commercial bank, Farm Credit System or other lender will lose
only a fraction of the loan amount. Assuming, conservatively, that
lenders recover only 50 cents on the dollar for their bad loans
reduces the actual loss to $32 billion. If the bad farm debt were
held entirely by commercial banks, this $32 billion loss would
represent only about 1.6 percent of the $2 trillion in loans and
securities held by the commercial banking system. Expressed as
a share of assets held by the much larger aggregate financial
community, this loss clearly can be absorbed with little aggregate
impact on credit markets. Certainly, some individual banks and,
perhaps, even the Farm Credit System, will fail if a loss of this
magnitude is realized, but the overall soundness of the financial
system is in no jeopardy.
To understand this point better, recall the mechanics of

bankruptcy. If a farmer defaults on his debt, his creditor assumes
ownership of the assets pledged as collateral, such as farmland,
buildings and equipment. If these assets were purchased at the
inflated prices of the late 1970s or early 1980s, they will be revalued
at substantially lower prices consistent with their capacity to
generate income employed in farming (or in a higher-valued
alternative activity). While one farmer leaves the industry by virtue
of his bankruptcy and the creditor absorbs a loss approximately
equal to the downward adjustment in asset prices, a new farmer
enters the industry (or a current operation expands) by purchasing
the bankrupt farm’s assets and employing them in farming.
Although the worst case indicates the loss of 200,000 farmers,
their replacement by new individuals implies only small changes
in the total number of farmers and little effect on farm output.
In fact, it is reasonable to expect that many of the owneroperators who become insolvent would continue to work as
farmers, either by renting land or working as hired labor.
A similar process would govern the adjustment of farm lenders
that fail. If commercial banks or the Farm Credit System incur
farm loan losses that render them insolvent, other financial
institutions will purchase the remaining good assets and write off
losses on the bad loans. For the most part, the end result of a
farm bank failure will be a similar institution (under a different
name and management) providing the same services formerly
supplied by the insolvent institution.
—Michael T. Belongia

Agriculture—An Eighth District Perspective is a quarterly summary of agricultural conditions in the area served by the Federal
Reserve Bank of St. Louis. Single subscriptions are available free of charge by writing: Research and Public Information Department,
Federal Reserve Bank of St. Louis, P.O. Box 442, St. Louis, Missouri 63166. Views expressed are not necessarily official
positions of the Federal Reserve System.
2



FEDERAL RESERVE BANK OF ST. LOUIS

FALL 1986

EIGHTH DISTRICT AGRICULTURAL DATA
Percent Change
Prices and C o sts 1

Jun.
1986

Jul.
1986

Aug.
1986

Average
for 1985

Year-To-Date
19862

Same Month
Year Ago

C O N S U M E R P R IC E IN D E X (% ch a n g e )
N o n fo o d
Food

0 .6 %
0.0

P R O D U C T IO N C O S T S FO R F A R M E R S (% ch a n g e )
A g ric u ltu ra l m a c h in e ry and e q u ip m e n t
M ixe d F e rtilize rs
O th e r A g ric u ltu ra l ch e m ic a ls
G a so lin e

0.2
0.2
0.9
3.7

-0 .1
-0 .3
0.9
-1 9 .2

0.2
-0 .9
0.2
-2 .0

0 .0
-0 .2
-0 .1
0.3

0 .7
-1 .0
5.6
-4 5 .6

0.7
-2 .8
3.6
-4 6 .0

-1 .6
1.5
-4 .4

3.3
7.5
-3 .7

0.0
3.5
-4 .8

-0 .4
-0 .5
-0 .5

-2 .3
8.0
-1 5 .3

-3 .3
15.6
-1 2 .3

FE E D E R C A T T LE
W h o le s a le p rice - K ansas C ity ($ /cw t.)

$ 58.50

$61.00

$65.75

$ 6 4 .5 5

7.8

6.9

FE E D E R PIG S
W h o le s a le p rice - So. M isso u ri ($/head)

$ 41.92

$50.76

$56.64

$37.11

97.7

65.8

P R IC E S R E C E IV E D B Y F A R M E R S (% cha n g e )
A ll p ro d u cts
L ive sto ck
C ro p s

-0 .2 %
1.3

0 .0 %
1.2

0 .3 %
0.2

- 0 .4 %
2.2

1 .0 %
4.4

B R O IL E R S
W h o le s a le p rice - 12-city (C/lb.)

58.29$

69.13$

69.72$

5 0.81$

43.1

3 9 .2

TURKEYS
W h o le s a le p rice - N ew Y ork,
8-16 lb. yo u n g he n s ($/lb.)

73.83$

77.85$

80.46$

7 5.48$

-7 .4

2 .7

CORN
W h o le s a le p rice - No. 2, ye llo w - St. Louis ($/bu.)

$ 2.52

$ 2.01

$ 1.67

$ 2 .6 6

-3 5 .5

-3 2 .4

SOYBEANS
W holesale price - No. 1, yellow - Central Illinois ($/bu.)

$ 5.43

$ 5.33

$ 5.00

$ 5 .5 6

-6 .0

-3 .9

W HEAT
W h o le s a le p rice - No. 1, h ard w in te r K a nsas C ity ($/bu.)

$ 2.80

$ 2.50

$ 2.48

$ 3.39

-2 7 .5

-1 8 .2

$13.00

$13.00

$11.88

$ 1 7 .7 0

-3 1 .1

-3 3 .1

-1 1 .4

-1 5 .7

LO N G -G R A IN R IC E
W h o le s a le p rice - A rk a n s a s ($ /cw t.)
CO TTO N
A v e ra g e p ric e re ce ive d by U .S. F a rm e rs ($/lb.)

56.40$

58.60$

47.20$

5 5 .8 4 $

P ercent Change
U.S. Exports
C o rn (m il. bu.)
S o yb e a n s (m il. bu.)
W h e a t (m il. bu.)
R ice (ro u g h e q u iv a le n t, m il. cw t.)
C o tto n (thou, bales)




Jun.
1986

Jul.
1986

Aug
1986

Average
for 1985

57.0
28.7

45.0
26.6
110.4
9.6
23.0

52.0
31.0
124.2
N.A.
272.0

145.8
5 3 .7
8 1 .7
5.1
4 1 8 .7

85.6
6.5
68.9

Year-To-Date
19862
- 7 1 .0 %
-6 7 .1
72.5
108.7
38.8

Same Period
Year Ago
-4 3 .5 %
17.9
38.0
91.1
31.5

3

Non-Real-Estate Farm Debt Outstanding
Banks
Outstanding
($ millions)
U .S.
E ig h th D is tric t4
A rka n sa s
K e n tu c k y
M isso u ri
T e n n e sse e

$ 3 4 ,2 1 5
2 ,684
5 07
601
1,197
324

PCAs3

Percent Change
6/85 - 6/86
6/84 - 6/86
-1 0 .5 %
0.5
16.4
6.5
-1 5 .8
-4 .0

-1 7 .1 %
-1 1 .4
-7 .2
-1 .2
-2 3 .0
-1 7 .7

Outstanding
($ millions)

Percent Change
6/85 - 6/86
6/84 - 6/86

$12 ,7 0 8
NA
238
243
249
244

- 2 3 .9 %
NA
- 2 9 .1
-2 6 .8
-3 0 .2
-2 3 .9

-3 5 .3 %
NA
- 4 3 .1
-4 6 .6
-4 6 .0
-4 3 .1

Agricultural Bank Loan Performance5
Percent of Farm Loans
Overdue at
Agricultural Banks
6/86
U.S.
E ig h th D is tric t4
A rka n sa s
K e n tu c k y
M isso u ri
T e n n e sse e

3 .9 %
4.3
1.7
4 .9
3.8
1.4

Percent of Total Loans
Written Off at
Agricultural Banks
6/84

6/85

3 .1 %
3.5
2.2
4.4
4.0
2.9

6 .1 %
7.1
8.5
6.3
8.3
5.8

6/86

6/85

.9 6 %
.58
.39
.44
.90
.56

.3 3 %
.30
.42
.13
.44
.27

Agricultural Production Loan Interest Rate6
Banks

E ig h th D is tric t A ve ra g e

PCAs

8/86

8/85

10.2%

1 1 .8 %

9/86

9/85

1 1 .5 %

1 1 .7 %

1 The consumer price index components are seasonally adjusted. All other data are not seasonally adjusted.
2 Percent change from December of previous year, based on the most recent month available.
3 Source: Farm Credit Banks of Louisville and St. Louis, Farm Credit Administration.
4 Includes all of AR and parts of IL, IN, KY, MO, MS and TN.
5 Agricultural banks are defined as those with more than 25 percent of total loans in agricultural loans.
6 Interest rate data are for different dates. PCA rates are weighted averages for Arkansas and Missouri, not adjusted for stock purchase requirements.
Source: Farm Credit Banks of St. Louis.




6/84
.4 1 %
.32
.24
.34
.51
.58


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102