USDA Sees 2016 Farm Income Crashing As Farmer Leverage Spikes to 34 Year Highs

The plight of the American farmer has been a frequent topic for us over the past couple of months.  A few weeks ago we pointed out how declining corn, wheat and soybean prices were leading to the first declines in farmland values in the Midwest since the 80s (see "Farmland Bubble Bursts As Ag Credit Conditions Crumble").  We also questioned whether California farmland was overvalued by $70 billion as almond prices have been cut in half over the past year and drought conditions threaten farming sustainability in many regions of the Central Valley (see "Is California Farmland Overvalued By $70 Billion?").

Most food grown in the U.S. has come under extreme pressure in 2016 due primarily to lower Chinese consumption resulting from the combined effect both a weak Chinese economy and a relatively strong U.S. dollar.  This slack in demand has resulted in massive supply gluts for several commodities as producers failed to adjust supply quickly enough to meet new levels of demand.

Unfortunately, per the USDA's latest farming income forecast for 2016 (released yesterday), conditions only look to be getting worse for farmers as demand still remains low but supply has been slow to adjust in the wake of improving yields.  Below are a couple of the key takeaways from the USDA's 2016 forecast.

Real farm incomes in 2016 are expected to sink below 2010 levels which represents a 34% decline from the recent peak and 14% decline YoY.

Farm Income

 

Meanwhile farm debt continues to rise at an astonishing rate...

Farm Debt

 

While farmer leverage has spiked to the highest level since the early 80s.

Farm Leverage

 

And of course, lower incomes means less money to spend on shiny new John Deere tractors with equipment capex expected to decline 31% YoY.

Farm Capex

 

And finally, farmer returns have crashed to the lowest levels ever.  We're not sure about you but a 2% ROIC seems a "little low" even in our current rigged interest rate environment.  So, there's only a couple of ways to fix that problem...either commodity prices have to recover quickly or farmland prices need to come down substantially.  Which do you think will happen first?

Farm ROIC