From the University of Illinois' FarmDoc Daily, Oct. 11:
U.S. farm sector capital expenditures continue to
adjust to declines in net farm income and net cash income since 2013.
Real net farm income has declined approximately 51 percent since its
most recent peak in 2013, while real net cash income has declined
approximately 29 percent since its most recent peak in 2012. Similar to
past periods of declining margins, U.S. farms have responded to the
declines in income by reducing capital expenditures. This article
examines trends in capital expenditures and compares capital
expenditures to capital consumption (i.e., economic depreciation).
Trends in Real Capital Expenditures
Figure 1 illustrates real U.S. farm capital
expenditures and consumption from 1973 to 2017. Capital expenditures and
consumption are expressed in 2016 dollars in figure 1. Capital
expenditures include tractors, trucks, autos, machinery, buildings, land
improvements, and miscellaneous capital expenditures. Capital
consumption represents the declining balance of capital stock or
economic depreciation. Using figure 1, two large increases in capital
expenditures and two large decreases in capital expenditures have
occurred since 1973. The first increase occurred during the 1973 to 1979
period. During this period, real capital expenditures increased from
$44.4 billion in 1973 to $56.0 billion in 1979. The 1979 peak represents
the highest annual capital expenditures level since 1973. The second
increase occurred during the 2009 to 2014 period. During this period,
real capital expenditures increased from $26.1 billion to $45.5 billion.
The first large decrease in real capital expenditures occurred from
1979 to 1986. Real capital expenditures declined approximately 71
percent from the 1979 peak to the 1986 trough. The second large decrease
is currently playing out. Since the 2014 peak, real capital
expenditures have declined approximately 36 percent. However, it is
important to note that real capital expenditures were similar in 2016
and 2017.
An alternative way to examine trends in capital
expenditures and consumption is to compute the ratio of capital
expenditures to capital consumption. This ratio is depicted in figure 2.
A ratio above 1 indicates that capital is being replaced at a rate
higher than economic depreciation. Conversely, a ratio below 1 indicates
that economic depreciation is larger than capital replacement. The
average ratio over the 1973 to 2017 period was 1.013, which indicates
that on average capital replacement exceeded capital consumption. The
annual ratio appears to be quite cyclical. The ratio of capital
expenditures to capital consumption was above 1 from 1973 to 1980, below
1 from 1981 to 1997, above 1 from 1998 to 2013, and below 1 since 2014.
The lowest annual ratios occurred during the 1980s farm financial
crisis. As noted above there was a substantial decrease in capital
expenditures in the 1980s. At the trough (i.e., 1986), the capital
expenditures to capital consumption ratio was only 0.52. The three
highest ratios occurred in 2008 (1.73), 2010 (1.46), and 2011 (1.70).
Obviously, U.S. farms replaced a substantial portion of their
depreciable capital during the 2007 to 2013 period. In the last couple
of years, the capital expenditures to capital consumption ratio has
dropped below 0.70. Though relatively low, the current ratio is still
above the ratios experienced from 1982 to 1986. It is also noteworthy,
that the ratio did not continue to drop in 2017, the 2017 ratio is
almost identical to the 2016 ratio....
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