June 2014
Ag Insight

Insight on Ag

Less Production, Debt in highly leveraged farm operations than 20 years ago

While the average leverage of farm businesses - as measured by debt-to-asset ratios - has decreased over time, some farms remain highly leveraged. The D/A ratio that implies financial vulnerability varies with individual farm business characteristics, but a commonly used threshold to indicate high leverage is a D/A ratio greater than 0.4. Using this definition, highly-leveraged farms consistently accounted for a disproportionate, but declining, share of the total value of production by all farm businesses between 1992 and 2011.

In 2011, 5.3 percent of farm businesses were highly leveraged and contributed 13.4 percent of farm businesses’ total value of production; by comparison, in 1992, 9.5 percent of farm businesses, responsible for 19.6 percent of production, were highly leveraged. The declining role of highly-leveraged farms suggests the sector’s financial resiliency has increased over time because financial shocks such as an unexpected drop in income or a sudden jump in interest rates would likely affect fewer farm businesses, producing a smaller share of the value of production.

Limits on Capital Expensing could affect farmers’ purchase decisions

Farming requires large investments in machinery, equipment and other depreciable capital. Such investments may be treated either as a current expense and deducted from gross farm income immediately, or capitalized and depreciated over time. For the past 4 years (2010-2013), if the cost was treated as an expense, the maximum deduction a farm could take was $500,000.

Unless the 2010-13 expensing limit is extended, it will fall to $25,000 for tax year 2014. This change could increase the cost of capital investment and significantly increase taxable income for some farms. Based on 2012 ARMS data, while 38 percent of U.S. family farms reported a capital purchase, less than 1 percent had expenses exceeding $500,000. Under a $25,000 expensing limit, 13 percent of farms would have exceeded the limit. Smaller family farms, in general, did not make investments exceeding the old limit, but about 9 percent would have exceeded the 2014 limit. Very large family farms (those with gross cash farm income in excess of $5 million) were far more likely to have capital costs exceeding both the old limit (35 percent) and the 2014 limit (78 percent).

Family Farms Dominate U.S. production of major field crops and hogs, poultry, eggs

Family farms, whether using the U.S. Department of Agriculture’s Economic Research Service definition based on majority ownership of the farm business or the Food and Agriculture Organization definition based on the predominance of family-supplied labor, account for a large share of U.S. agricultural production. However, their relative production within commodity groups varies.

Family farms were particularly important in the production of major field crops (corn, cotton, soybeans and wheat) where they accounted for 62-96 percent of U.S. production in 2011, and in hogs, poultry and eggs where they accounted for 68-96 percent of production.

Family farm production shares are lower in every major commodity category when focusing on the share of farms where the principal operator and spouse provide most of the labor used on the farm (the FAO standard). Large farms, often family-owned that are heavily reliant on hired farm labor and contract service providers, account for a large share of U.S. production, particularly in high-valued crops (fruit, nuts, vegetables and nursery) and dairy. For example, family-owned and -operated farms account for 75 percent of dairy production, but the operator and spouse usually provide less than half the labor on those farms.

Ag Research leads to discoveries with potential commercial applications

USDA has released a new report on scientific breakthroughs discovered by department researchers that led to new patents and inventions with the potential for commercial application and potential economic growth. Studies have shown that every dollar invested in agricultural research returns $20 to the economy.

In the last fiscal year, USDA reports receiving 51 patents, filing 147 patent applications and disclosing 180 new inventions. The results are detailed in the Department’s 2013 Annual Report on Technology Transfer.

Helping drive these innovations, USDA has 259 active cooperative research and development agreements with outside investigators that include universities and other organizations, as well as small businesses.

USDA’s technology transfer program is administered by the Agricultural Research Service, USDA’s principal intramural scientific research agency.Discoveries from USDA’s 2013 report include:

Over the years, USDA innovations have created all sorts of products Americans use or benefit from every day. Among them are frozen orange juice concentrate, permanent press cotton clothing, mass production of penicillin in World War II, almost all breeds of blueberries and cranberries currently in production, and 80 percent of all varieties of citrus fruits grown in the United States, and "Tifsport," a turf used on NFL, collegiate and other sports fields across the country, specifically designed to withstand the stress and demands of major team sports. Tifsport is also used on PGA and other golf course fairways, while its sister turf, "Tifeagle," specially designed to be mowed to one-tenth of an inch daily, is used on PGA putting greens.