Farmers’ cash flow position improved in 1985 largely because of high direct Government payments and increased Commodity Credit Corporation loans. However, farmers’ equity positions continued to erode because of the drop in real estate values. The proportion of farms in the most serious financial difficulty (high debt/asset ratios and negative cash flows) declined from 12.5 percent in 1984 to 11 percent in 1985. The Com Belt, the Northern Plains, and the Lake States accounted for over 60 percent of these farms. Financial stress was highly concentrated among farms with annual sales of $40,000 or more and among grain and general livestock farms.