Pat Westhoff, the director of the Food and Agricultural Policy Research Institute at the University of Missouri, indicated in a column on Saturday that, “In the 1980s, farm financial stress was severe. Farm income was low, debt rose to unsustainable levels and a wave of bankruptcies contributed to a crash in farmland values.
“This is not the 1980s. The ratio of farm debts to farm assets is much lower now than it was in 1985. Interest rates are far lower, and very few farms are behind on debt payments.
“However, these are difficult times for many U.S. farmers and ranchers. Net farm income is less than half the record level of 2013. Prices are down for almost every major farm commodity, from corn, soybeans and wheat to cattle, hogs and milk.”
Dr. Westhoff added that, “Each year, our institute puts together a 10-year outlook for the U.S. farm economy. Our March 2016 outlook tells the same story we’ve been telling for some time — more tough times are ahead.
“After peaking at $6.89 per bushel for the crop harvested in the drought year of 2012, corn prices have averaged less than $4 per bushel for the past two years. We expect more of the same. Similar stories hold true for soybeans, wheat, sorghum, cotton, rice and almost every other major crop grown in this part of the country.”
Saturday’s column also noted that, “[R]eductions in production costs and the increase in [federal government] payments are not nearly enough to offset the decline in sales receipts. That’s why net farm income has decreased so sharply.”
In a related item regarding the 1980s, DTN Farm Business Advisor Danny Klinefelter noted in an article this week that, “Financial watchdogs are still smarting from the 2008 financial crisis and don’t want to be behind the curve this time. They’ve imposed stricter risk-based capital requirements, more burdensome documentation and more proactively aggressive monitoring. Risk can originate from weaker borrower financial condition, more carryover debt, concentration in the lender’s portfolio and increased counter-party risk (say when a vendor or supplier fails, causing a domino effect on customers).
“Fortunately — as opposed to the 1980s farm financial crisis — ag banks and the Farm Credit System haven’t been responsible for overly aggressive lending. Many have required down payments as large as 50% on farm mortgages. Much of what caused land values rising above amounts lenders would finance has been the result of borrowers pledging other debt-free assets to secure the loan; they’ve used their own money (liquidity) to pay prices above the lendable value of the land purchased.”
Meanwhile, Reuters writers Tom Polansek and Karl Plume reported today that, “Three years into a grain market slump, U.S. farmers are set to plant more corn, taking a calculated gamble that higher sales will help them make up for falling prices without triggering even more declines.
“Forecasts suggest that at current prices growers will be able to cover their variable expenses such as seed and fertilizer. By planting more and scrimping on everything from labor to crop chemicals, farmers hope to cover a portion of hefty fixed costs, including land rents.
“Their strategy marks a reversal from the last time that prices for corn, soybeans and wheat fell for three years running in mid-1980s. At that time, farmers cut production and prices began rising.”
The Reuters article added that, “Barring a weather disaster, more corn planted means a bigger harvest that will add to massive global crop inventories that have kept prices below break-even levels. The swollen stockpiles also make any price recovery unlikely even if U.S. output were to decline.
“With no rebound in sight, cranking up production might be the best shot U.S. farmers have at balancing their books in a falling market, economists say.”