While nominal, agricultural debt in Illinois has increased over the last decade, it does not appear to be a cause of concern for the state's agricultural sector, according to a University of Illinois Extension study.
"Debt level increases have not resulted in a worsening debt-to-asset position nor have they resulted in an increase in interest expense per tillable acre," says Gary Schnitkey, U of I Extension farm financial management specialist who wrote the study.
"While debt levels do not appear to be a concern, agricultural returns are not likely to increase in the near future. Production expenses and cash rents recently have increased causing per acre returns to decrease. These return decreases are not likely to lead to severe problems in servicing debt or substantial increases in default risks."
However, Schnitkey cautions that farmers will continue to face difficulties in generating sufficient funds to support farm living.
"This will lead to pressures to maintain or increase cash flows by increasing farm size, seeking off-farm opportunities, and decreasing per acre costs," he says. "Obviously, this situation is not new, having been occurring during the past several decades, but becoming more pronounced after the commodity price decline occurring in 1998."
Schnitkey bases the study on data from the USDA and the Illinois Farm Business Farm Management (FBFM) Association.
"The debt-to-asset ratio on the average FBFM grain farm had a very slight downward trend since 1991," he says. "While debt-to-asset ratios have declined, overall debt levels have increased. Debt levels were $258 per tillable acre in 1991 compared to $368 in 2004, an increase of over $100 per acre.
"While debt levels have increased, interest expense per tillable acres actually has declined since 1991. Interest expense was $20.72 per tillable acre in 1991 and $18.63 in 1992, while in 2003 and 2004 interest expense was $16.02 and $15.18, respectively. Lower interest rates in the late 1990s and early 2000s caused the reduction in interest expense per tillable acre in the face of rising debt levels per acre."
Schnitkey says that the study may suggest that holders of agricultural debt are changing.
"Individuals other than farmers may be increasing their share of agricultural debt," he says. "A logical group that may be increasing their share is non-operators purchasing farmland. Statistics in this study are too limited to draw definite conclusions about this potential trend, but future studies may wish to examine it."
The complete study can be read at Extension's farmdoc website at: http://www.farmdoc.uiuc.edu/manage/newsletters/fefo05_11/fefo05_11.html.