Study: Large farms face greater financial risk in current economy
WASHINGTON — If the U.S. farm economy continues to deteriorate, large farms are more likely to face financial risk than smaller farms, a USDA study released late last month said.
Since farm income peaked in 2012, the number of small farms in financial risk has declined, the study said — probably because they’re more dependent on off-farm income. Small farms are defined as those with less than $100,000 in yearly gross income.
The study, which was conducted to compare current economic conditions with past periods of financial stress in U.S. agriculture, determined that net cash income fell by a third between 2012 and 2017 after adjusting for inflation — the largest multiyear decline since the 1970s in percentage terms.
But while American agriculture may be less prosperous at the moment, the downturn hasn’t been as extreme as the 1980s farm crisis, when a glut of commodity production and a decline in U.S. exports led to sinking prices and soaring farm debt. While more than 85 percent of large farms — those with more than $100,000 in yearly gross income — are not in financial risk, rising interest rates could change that, the report said.
“Lower commodity prices in the near future would make it more difficult for some farmers to meet their loan obligations and pay for production expenses,” the report said. “Farmers who made substantial investments in machinery or land when commodity prices and farm incomes were high could face elevated risks of financial insolvency.”
Hog, poultry and dairy farms are most at risk if gross income fell significantly from 2017 levels. If farm income fell 20 percent, for instance, nearly 6 percent of all hog and poultry farms and nearly 7 percent of dairy farms would be in extreme financial stress, which is defined as having a debt-to-asset ratio of more than 55 percent and not having enough household income to meet loan payments.
“Dairy farms… tend to be relatively large-scale, capital intensive and highly leveraged and, hence, more vulnerable to a decline in farm revenues,” the report said.
Nurseries and farms focused on specialty crops, fruits and nuts were least risky. If farm income fell by 20 percent from 2017, just 1 percent of those farms would be in extreme financial stress. Young and beginning farmers are also more vulnerable in the current farm economy, the report said.
Delmarva farmers may benefit from the region’s product diversity, said Richard Wilkins, president of the Delaware Farm Bureau.
“We’re not totally dependent on just, say, two crops like corn or soybeans,” he said. “The regional has been able to weather this downturn better than some other regions have been able to.”
The farm sector would also be in significantly worse shape were it not for the USDA’s compensatory payments in response to the ongoing trade war between the United States and China, Wilkins said. More than a third of U.S. farm income — about $19.5 billion — will come from direct farm-payment programs this year, according to the USDA. Crop insurance indemnities will pay another projected $10.5 billion.
Across the farm sector, however, just 1 percent of all farms are in extreme financial stress, the report said.
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