Amid Strong Farm Economy, Some Worry About Increased Debt

By Beacon Staff

DES MOINES, Iowa – At a time of record agricultural profits, concerns are mounting that American farmers could be edging toward a financial crisis not seen since the 1980s farm-economy collapse.

Soaring land values, increasing debt and a reliance on government subsidies for ethanol production have prompted economists to warn that what some describe as a golden age of agriculture could come to a sudden end. At risk are the livelihoods of thousands of farmers, the health of hundreds of banks and the vitality of an agricultural industry that has been one of the nation’s few economic bright spots in recent months.

“We’re in a very risky time, and yet we don’t seem concerned about that risk nearly as much as we should be,” said Barry L. Flinchbaugh, an agricultural economist at Kansas State University.

The potential problem, economists said, is that strong demand for corn and other grains has caused prices to reach historic highs. That has led to record farmland values and steadily increasing debt as farmers borrow money to buy more land, finance the higher costs of fertilizer and seed and upgrade their equipment.

As long as the demand remains, good times for farmers should continue. But if demand falls, they could find themselves in a situation reminiscent of the early 1980s when the farm economy largely crumbled.

Among factors that could affect demand would be a change in the federal government’s policy on ethanol subsidies, now estimated at about $6 billion a year, revisions in the farm bill that would lower support payments or an increase in the dollar’s value, which would hurt exports.

Farm economists question whether the federal backing for ethanol will continue in the face of complaints that soaring corn prices are increasing food costs. Corn is used in most animal feed and is a key ingredient in myriad other products.

“U.S. energy policy has been friendly to ethanol in the last couple of decades. The question is, will it continue to be. It’s running up food prices and that’s causing pressure on Congress to limit mandates for ethanol usage,” said Neil Harl, an emeritus professor of economics at Iowa State University.

The farm bill appears mired in Congress as lawmakers bicker with the Bush administration, which has threatened a veto if any increases in spending are not offset by reductions elsewhere. Congress on Thursday passed a short-term extension to the 2002 farm bill that keeps programs funded through April 25.

Flinchbaugh and others said the agricultural economy bears a striking resemblance to that seen in the mid-1970s, when a seemingly insatiable demand for U.S. crops drove up land values and farmers took advantage of their soaring equity to increase debt. When federal policy changed and demand suddenly dropped, land values and farm income plunged, forcing thousands of farmers to sell out and leading to the failure of nearly 300 agricultural banks.

Grain farmer Harlan Meier, 76, of Davenport lived through the last two major farm economy downturns _ the Depression in the 1930s and the 1980s farm crisis.

Even at a time of such strong prices, Meier noted that farmers are paying much higher prices for seed and nitrogen fertilizer, a product needed in abundance for fields repeatedly planted in corn. The increased costs and memories of the 1980s have made him hesitant to take on debt.

“I guess you could say there’s an awful lot of concern in the rural communities and with some of the city people,” Meier said. “I would think there would be a lot of cautiousness among farmers because most of the people can remember the ’80s and I would think there’s probably a lot of cautious people now on spending a lot of money.”

Economists worry that farmers could be tempted to add debt due to the belief that high commodity prices would continue.

Those prices have been driven up by a strong demand for corn and soybeans from countries such as China and India, coupled with the needs of more than 50 corn-reliant ethanol plants built in the last few years.

The cash price for corn on the Chicago Board of Trade has soared from $1.86 a bushel in the 2004-2005 marketing year to the current price of about $6 per bushel. Soybeans were at $5.88 a bushel in 2004-2005 and now are at around $13.50.

As prices have climbed, so have farmland values. In Iowa, the nation’s biggest corn producer, the average price per acre of farmland has increased 67 percent in the past five years.

“Land prices are increasing dramatically, and prices of grains are high just like the ’70s,” said Danny Klinefelter, an extension economist at Texas A&M. “It concerns me. It concerns me a lot.”

Harl, who has written extensively on the 1980s farm crisis, said the key is how much debt farmers take on, and it appears that amount is increasing significantly.

“The longer these higher commodity prices go, the more it will draw people in to borrow heavily to buy the land and that’s when things get dicey,” Harl said.

According to the U.S. Department of Agriculture, farm business debt is expected to reach $228 billion by the end of this year, an $8 billion increase from last year and a new record for the fourth consecutive year.

The government said much of the debt is driven by the need for new machinery, equipment and grain storage, as farmers strive to keep up with the increasing demand for grain.

Debt for land is expected to rise to nearly $121 billion this year, a 2.8 percent increase.

And the USDA said from the beginning of 2003 to the end of 2008, total farm debt will have increased by about $52.8 billion, or more than 30 percent.

Recent reports filed by agricultural lenders shows the government’s expectations are playing out in reality.

Farm Credit Services of Mid-America, which provided $12 billion in agricultural loans for farmers in Indiana, Ohio, Tennessee, and Kentucky last year, noted in its annual report for 2007 that high crop prices “have created a much more risky and volatile agriculture economy.”

The group’s lending was up 15.2 percent over the loan volume of the year before.

Omaha-based Farm Credit Services of America, which served 70,000 farmers in Iowa, Nebraska, South Dakota and Wyoming last year, reflected similar increases in farm lending.

Harl said the current farm economy reminds him of about 1974 or 1975 _ several years before the boom went bust.

In the 1980s, changing government policies, including a grain embargo against the Soviet Union after the invasion of Afghanistan, drastically cut farm exports. Farm productivity remained high, government surpluses soared and the resulting oversupply drove commodity prices and land values down dramatically.

In addition, efforts to control inflation drove interest rates higher and caused land values to plummet. Farmers, who had bought land in hopes of benefiting from the strong commodity prices, were left holding debt on property that was worth less than they owed.

Farm foreclosures exploded across the countryside, hurting not only farmers but the companies that supplied them, such as farm implement manufacturers and seed distributors.

It all seems familiar to the Rev. David Ostendorf of Chicago, a United Church of Christ minister who once led PrairieFire Rural Action, a group that tried to save family farms during the 1980s crisis.

“With the price of land going as it is through the ceiling once again, the debt load’s going up. I think all the signals are there for a potential repeat of the late ’70-early ’80s and it’s critical that we not forget the lessons of our recent and long-term history out there,” he said.

The similarities are not lost on farmers.

Phil Lehman, a corn and soybean farmer in the tiny central Iowa town of Alleman, said the 1980s farm crisis nearly broke him and has left him far more conservative about taking on debt.

“Even if I don’t foresee a rapid change like happened in the ’70s, the same things could easily happen, perhaps over a longer period of time,” Lehman said. “I think farmers are very vulnerable at this point for a rough turnaround.”

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