Let’s go retro and compare and contrast yester-year’s farm balance sheets in the 1980s to those today in the second decade of the 21st century.
First, the U.S. farm balance sheet from a debt and equity position is much stronger now than it was in the 1980s. The debt to asset ratio in the 1980s ranged from 20% to 24%, compared to 10% today. That being said, debt was dispersed over a larger number of producers in the prior periods, but is now concentrated amongst fewer producers that tend to be commercially oriented and in a growth mode, generating larger amounts of revenue. Debt-to-asset ratios for commercially oriented growing producers tend to be in the 40% range. Farm debt on the balance sheet shows more fixed rate debt opposed to variable rate debt schedules of the 1980s. Fixed rates reduce risk, with the prospect of rising interest rates.
Selected producers of the current era are more aware of the importance of working capital, or assets that can be turned to cash without disrupting normal operations. Many producers understand the importance of balance sheet flexibility through working capital because of extreme volatility as a result of playing in the global economic marketplace.
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In the 1980s, approximately 75% of farm assets were valued in land and 25% in livestock, machinery and current assets. With the appreciation in land values, today’s typical balance sheet is 90% land and 10% other assets. The point to ponder is that the average farm balance sheet is much less financially liquid because it is concentrated in land assets. Land devaluation in the next downturn will represent significant loss of wealth, particularly a paper loss.
Finally, 1980s balance sheets had little uniformity of information and methods for statement development. Today as the result of the Farm Financial Standards Council promoting uniformity in financial statement construction and analysis of key ratios, farm balance sheets and other financial statements can be more accurately compared and contrasted which is a positive result. The balance sheet’s structure and risk have changed over the decades, some for the better and in other cases not.
P.S.A tsunami on the balance sheet is the issue of deferred taxes as a result of accelerated depreciation and expense and revenue adjustments. This could potentially result in reducing equity as much as 10-30% in some cases.