Chapter XII: Measurement and Composition of Farm Household Wealth

1. 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

2. Why the Long-Standing Interest in Farm-Household 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

3. 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

4. Farm Households Allocate Own Resources to Multiple Uses Farm Operation Non-farm Economic Activity Farm Operator Household Resources • Output/Revenue • Crop • Livestock • Conservation • Environment • Government • Services • Other Self-employment Another Farm Another Business Wage and Salary Saving Investment • Labor • Managerial Skill • Entrepreneurial Capacity • Financial Assets • Physical Assets Purchased Inputs Capital Investment

5. 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 Non-farm Net Worth equals Non-farm Assets minus Non-Farm Debt Farm Net Worth equals Farm Assets minus Farm Debt Farm Debt Non-farm Debt Real estate debt Non-real estate debt Short-term debt Long-term debt Farm Household Net Worth equals Farm Net Worth plus Non-farm Net Worth Credit cards Car payments Non-farm business debt

6. Sources of Farm Household Net Worth Total Farm Household Assets were $633,525 in 1999Farm Assets were $435,438 Non-farm Assets were $198,087 Total Net Worth of Farm Operator Households was $563,562 in 1999 $389,498 $174,064 Agricultural Resource Management Survey, 1999

7. Non-farm Assets of Farm Operator Households $41,598 $61,407 $51,503 $43,579 Agricultural Resource Management Survey, 1999

8. 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-BeingLevel 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

9. 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.

10. Rural Farm Household Balance Sheet