Although 1985 was a relatively high-income year for agriculture, the farm sector is still under a great deal of financial stress. High direct government payments and increased Commodity Credit Corportion loans improved the cash income of U.S. farmers in 1985. However, the continuing decline in real estate values reduced farmers' asset and equity levels. This erosion of asset values has exposed both farmers and the institutions that provide them credit to an increasing level of risk. Financial difficulties of farmers throughout the country varied widely, with family-sized commercial farms and Midwestern cash grain farms experiencing the greatest stress. Lake State, Corn Belt, and Northern Plains farms held nearly 54 percent of all farm debt. Nationwide, highly leveraged farms (with a debt/asset ratio greater than 0.4) owed almost two-thirds of all farm debt. Total debt, however, declined by over $7 billion as lenders appear to be continuing to impose credit restraint on their borrowers and encourage them to reduce their debt and limit their capital spending. Thus, while government purchases and direct payments, accompanied by tight cost control measures, have allowed many of these producers to maintain a cash flow adequate for their obligations, continued federal government involvement may be necessary as the sector adjusts to lower commodity prices and possibly further declines in asset values. (MN)