Balance Sheets for Household-Firms in Agriculture

Economic Research Service, USDA1800 M Street NWWashington DC 20036morehart@ers.usda.govINTRODUCTIONThe balance sheet is a fundamental ﬁnancial state-ment. Yet many businesses and most households,including those that own a business, rarely constructand analyze their personal balance sheet. Balancesheets can also be prepared to represent the ﬁnancialposition of an industry. USDA’s Economic ResearchService has constructed a balance sheet for the farmsector annually since the 1940’s.The balance sheet shows the ﬁnancial position of anindustry, business or a household at a speciﬁc pointin time. It reﬂects the cumulative outcome of ﬁnancialtransactions that have occurred prior to that date. Thebalance sheet is constructed around the accountingequation that requires:Assets = Liabilities+OwnerEquity. (1)Assets include everything of monetary value that isowned. They are valued using either a cost or cur-rent market value basis. Liabilities include all claimsagainst the business or an individual. Owner equity,also referred to as net worth, represents the amountof capital provided by owners and by the business’sretained proﬁts if all debt obligations were paid in full.At issue is the degree of separability maintained be-tween the household and business when balancesheets are constructed for these different levels of ag-gregation and the problems that arise from using dif-ferent data sources and concepts (Hill). Many farmbusinesses are unable to make a clear distinctionbetween business and family assets and liabilities.This is particularly true where the farm and family ex-penses are paid for out of the same account. More-over, balance sheets that focus solely on productionagriculture will not address today’s agricultural pol-icy issues nor adequately represent the diverse eco-nomic activity of farm households.The balance sheet has many applications. One of themost important uses is in determining net worth andcomputing changes in net worth over time. Lenderstypically require a balance sheet when evaluating theﬁnancial position of loan applicants. Conversely, thebalance sheet can be used to support a request forborrowed funds. The balance sheet also providesguidance for certain ﬁnancial decisions, such as howbest to meet repayment requirements of different lia-bilities.BALANCE SHEET OF THE U.S. FARM SECTORThe balance sheet of the farm sector describes thevalue of the physical and ﬁnancial assets in U.S. pro-duction agriculture and the claims against those as-sets. It is used to assess the wealth (net worth) of thefarm sector at a point in time and monitor changes inthe sector’s net worth over time. When combined withinformation from the sector’s income statement it canbe used to evaluate the proﬁtability and efﬁciency offarm ﬁrms in the aggregate.The farm sector balance sheet includes all farm as-sets and debt regardless of ownership and uses cur-rent market prices to value assets. The balance sheetexcludes assets and debt of agribusiness ﬁrms thatsupply inputs or market or process farm products andthe value of machinery leased to farmers by agribusi-ness ﬁrms. Leased machinery is considered an as-set of the service input sector (payments for the ﬂowof services from leased machinery are an expense inthe farm income account). However, farm machineryowned by a farm operator and leased or contractedto another operator is part of the balance sheet. Thebalance sheet of the farm sector includes assets anddebt of operators and non-farm landlords. However,because it excludes non-farm assets and liabilities, itis not a consolidation of the balance sheets of all indi-vidual farm operators and landlords.1