Storm clouds

The financial measures of working capital and debt signal that caution toward the farm economy is still warranted.

After our earlier post about the U.S. Department of Agriculture’s latest farm-income estimates, we received numerous emails from readers. Their questions, broadly speaking, were variations of “is the farm economy really improving?” and “why doesn’t it feel like things have improved?” In this week’s post we provide additional context, including two financial measures – working capital and debt – that signal caution toward the farm economy is still warranted.


To summarize the earlier post, the latest USDA’s net-farm-income estimates show an improvement in 2019. Specifically, 2019 at $88 billion is forecasted to be a large improvement as compared to 2016 at $66 billion. A combination of cost reductions – realized in 2018 and carried into 2019 – along with the 2019 Market Facilitation Program actually pushed net farm income to more than the 90-year average for net farm income of $85 billion. In that post we also noted the challenges of the ad hoc Market Facilitation Program. Current estimates have the Market Facilitation Program providing $10 billion of support in 2019 alone. That’s to say the farm economy in 2018 and 2019 has been supported by a program with an uncertain future.

In our replies we reminded readers of the challenges of using a single measure to draw conclusions on something as large and diverse as the U.S. farm economy. While net farm income is a useful and insightful measure, it like any single measure struggles to capture the full story. For example a shortcoming of net farm income is that it doesn’t capture all the financial obligations of a farm – such as family living expenses or debt service.

Working capital decreases

In an earlier post we noted that working capital is one of the most straightforward and useful indicators of farm-sector financial conditions. Total dollars of farm-sector working capital have decreased from more than $160 billion in 2012 to a forecast of less than $60 billion in 2019. Net farm income has trended better since 2016 but working capital is expected to decrease in 2019. While the 2019 forecast is admittedly subject to future revisions, the reality is working capital has failed to substantially rebuild during the past four years.

Figure 2 shows working capital as a share of gross revenue. That measure provides context; the working-capital level has decreased to less than 15 percent in recent years. It had been equal to 30 percent or more of gross revenue during the farm-economy boom. The current forecast is an improvement compared to earlier 2019 forecasts, but the downward trend is still concerning.

Farm debt increases

Another balance-sheet measure to consider is total debt. In 2019 total debt is forecasted to reach $416 billion, an increase from $402 billion in 2018. The measure has been steadily increasing during the past 10 years. Total debt has increased at an average annualized rate of 3.9 percent since 2010.

Wrapping it up

While net farm income has shown a story of improvements in recent years, concerns about the farm economy remain. Two measures from the balance sheet – working capital and total debt – point to troubling realities.

First producers have been dipping into working-capital reserves since 2012. Working capital is the first line of defense in an operation’s risk-management plan. As working capital depletes so does producer ability to weather future uncertainties. At the same time producers have continued to rely on growing levels of debt.

Considering those two measures together, one is left with the conclusion that producers have been burning working capital and using new debt to bridge financial shortcomings. While that was an expected strategy as net farm income decreased from 2014 to 2016, there has not been a pause in recent years even as net farm income improved.

The implications are that net farm income at the sector level has not improved enough to stabilize financial conditions. Even though farm income is currently at levels more than the long-run average, there are not enough profits to satisfy all financial obligations. Family living and debt service are two large obligations that don’t fall on the income statement but impact financial conditions.

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Brent Gloy and David Widmar are agricultural economists with Agricultural Economic Insights.