Transcript Chapter XII: Measurement and Composition of Farm Household Wealth James D. Johnson and Mitchell J.

Chapter XII: Measurement and
Composition of Farm Household
Wealth
James D. Johnson and Mitchell J. Morehart
Economic Research Service
Rome, Italy
29 June-1 July, 2005
Why the Long-Standing Interest in FarmHousehold Wealth Measures
At the Household Level
 Source of Income, Expenditure for the Household
 Measure of Economic Resiliency, Potential Source to Support
Consumption
 Insight into Farmers’ Wealth Building, Portfolio Diversification
 Retirement and Financial Security in Later Life
 More Comprehensive Measures of Household Economic Well-Being
At the Farm Business Level
 Asset Ownership and Management
 Financial Position, Solvency, Liquidity, Profitability
 Access to Credit Markets
Constructing an Estimate of Wealth (Net Worth)
Net Worth Equals the Value of all Real and Financial Assets
Less the Sum of all Debts for the Same Time Period
Balance Sheets for Households are Constructed Around the
Accounting Equation
Net Worth = Total Assets – Total Liabilities
Farm Households Allocate Own Resources to
Multiple Uses
Farm Operation
Output/Revenue
•Crop
•Livestock
•Conservation
•Environment
•Government
•Services
•Other
Purchased Inputs
Capital Investment
Non-farm Economic Activity
Farm Operator
Household
Resources
•Labor
•Managerial Skill
Self-employment
Another Farm
Another Business
•Entrepreneurial
Capacity
Wage and Salary
•Financial Assets
Saving
Investment
•Physical Assets
Farm Household Net Worth (Wealth) Originates
From Farm and Non-Farm Sources
Non-farm Assets
Farm Assets
Cash, checking, CDs, money
market accounts
IRA, 401K, Keogh and other
retirement accounts
Corporate stock, mutual funds,
and cash value of life insurance
Other non-farm assets
Land and buildings
Farm equipment
Financial assets
Other farm assets
Farm Net Worth
equals
Farm Assets
minus
Farm Debt
Non-farm Net Worth
equals
Non-farm Assets
minus
Non-Farm Debt
Farm Debt
Real estate debt
Non-real estate debt
Short-term debt
Long-term debt
Non-farm Debt
Farm Household Net Worth
equals
Farm Net Worth
plus
Non-farm Net Worth
Credit cards
Car payments
Non-farm business debt
Sources of Farm Household Net Worth
Farm
Non-Farm
69%
Total Farm
Household
Assets were
$633,525 in 1999
Farm Assets
were $435,438
$389,498
$174,064
Non-farm Assets
were $198,087
Agricultural Resource Management Survey, 1999
31%
Total Net
Worth of
Farm
Operator
Households
was
$563,562 in
1999
Non-farm Assets of Farm Operator Households
Cash, Money Market, etc
Stock, Mutual Funds, etc.
IRA's, Keough, 401K, etc
Other Nonfarm Assets
21%
31%
$41,598
$61,407
$51,503
$43,579
22%
Agricultural Resource Management Survey, 1999
26%
Household Wealth Estimates Enable Analyses of
Economic Condition and Well-Being
 Capital Gains as Income
Realized Gains or Losses
Unrealized Gains or Losses
 Household Savings
Savings = (household income – expenditures)
= (new funds + debt repaid)
= (difference in net worth + or – change in asset value + transfers)
 Measure of Household Economic Well-Being
Level of Wealth
Distribution of Income and Wealth
Econ. Well-Being Indicator = (Household Income + Annuity Value of Net Worth)
 Intergenerational Transfer of Assets
 Farm Household Liquidity
 Household Portfolio Composition
Concluding Comment
The Handbook recognizes that farm
households may have multiple sources of
farm and non-farm assets and/or liabilities.
Accurate and complete estimates of net
worth measures take into account both
farm and non-farm sources of wealth, and
recognize that farm wealth may not be
owned entirely by farm households.
Rural Farm Household Balance Sheet
Assets
Liabilities and Total Net Worth (Owner's Equity)
Current Assets (Short-term liquidity):
Current Liabilities (Short-term):
Cash / currency
Accounts Payable
Financial assets / securities (stocks and bonds)
The current value of all savings forms
Money or goods lent to other institutions or
people outside household
Value of the crop output retained as seed (stock
of grain)
Accounts Receivable
Total Current Assets
Inventories (liquid assets)
Raw materials
Intermediate goods / products
Sales Taxes Payable
Payroll Taxes Payable
Accrued Wages Payable
Dividends Payable
Unearned Revenues
Short-Term Notes Payable
Short-Term Bank / Credit Union / Cooperative /
(Value of) Unsold (finished) goods / products
Money Lender Loan Payable
Total Inventory
Total Current Liabilities
Non-Farm Assets
Fixed (long-term) Assets:
Long-Term Liabilities
Land
Long-Term Notes Payable
Buildings (business or commercial property)
Mortgage Payable
Tools
Long-term Bank Loan
Machinery
Amount owed for leases
Furniture
Bond repayment
Vehicles
Deferred taxes
Equipment
Depreciation (Machinery)
Other obligations not requiring interest payments
Durable (consumer) goods
Housing
Other Durable Consumer Goods Items
Total Long-term Non-Farm Assets
Total Liabilities
Assets
Farm (Agricultural) Assets
Agricultural land
Total Net Worth (Owner's Equity)
Owner's Equity (Net Worth)
Capital / Common Stock
Owned
Net Profit (Surplus)
Mortgaged
Retained Earnings
Rented/sharecropped
Rented out
Animals
Value of livestock
Value of poultry
Drafts animals
Bullocks
Farm equipment
Tractors
Carts
Vehicles
Mechanical plough
Pump
Mill
Food processor
Trailer for truck / tractor
Trolley
Fodder cutting machine
Generator
Non-mechanical farm tools (implements)
Hoe
Spade
Durable equipment for storage
Total Farm (Agricultural) Assets
Total Net Worth
TOTAL ASSETS
TOTAL LIABILITIES + TOTAL NET WORTH