What does the farm family net worth mean?

Farmer net worth may be at historic levels with commodity prices high and land prices probably higher than ever. However, all things are relative. A recent Yahoo Finance article made me wonder about how average farmer net worth stacks up against the average American’s net worth.

The article pointed out the results of a Federal Reserve Survey of Consumer Finances released in September 2020. The survey found that the average net worth of an American household was about $748,800. At first glance, that number seems shockingly high. However, the top 10% of households hold about 70% of the wealth, which skews the average (mathematical mean) upward tremendously.

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If you look at the middle (median) net worth of all U.S. households, you get only $121,700. This seems reasonable considering many families carry a mortgage on their home and loans on their vehicles. When looking at averages, you also have to consider the disparity between the net worth of older folks, who have had time to accumulate assets and pay off debt, and younger people with few investments. Some young people are coming out of college with a car, a small bank account, and $100,000 of education debt; i.e., negative net worth.

What does net worth look like for American farmers? According to the USDA Economic Research Service (ERS), “In 2020, the average U.S. farm household had $1,714,559 in wealth.” ERS adds that households operating commercial farms had $2.8 million in total wealth at the median. Obviously, this is substantially more than nonfarming families. For commercial farmers, their median family net worth is 23 times the median American family net worth.

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How Did It Get That Way?

In 1900 about one-third of the U.S. population was feeding the other two-thirds. Today, less than 2% of the population farms. The massive consolidation for more than a century means fewer families farming larger operations. This necessitates more capital per family. Also influencing the difference is the time value of money. Some farming families have had four or more generations to acquire and pay off farmland, which was only $20 an acre in 1900, according to the USDA National Agricultural Statistics Service.

Farm income does not compare as favorably. According to the ERS article, “In 2020, the median income of farm business households was $62,402, compared to $89,492 for self-employed households.” The $2 million of farm capital is not generating the kind of net income you would expect — only about 3%. If you take the long view, generational farm families are probably making more on asset growth than on annual farm net income. That $20-per-acre farmland has turned into more than $4,100 today, which is about a 4.5% return on investment over a 121- year holding period.

Are farmers currently running a lot of debt against their farm assets? Not really. According to February 2022 data from the ERS, farm debt against farm assets is still only about 14%, though it’s been slowly rising for the past 10 years.

Bottom line, if you don’t have some capital in the 21st century, you can’t afford large-scale farming. It takes a tremendous amount of money to acquire tillable farmland, farm equipment, and even the annual inputs to raise a crop. Those capital requirements are currently increasing faster (via inflation) than they have in the past 40 years. The good news is that productive assets, especially those necessary for the sustenance of life, tend to do well historically during periods of high inflation.