For Farmers, a Precarious Balance Between Debt and Riches

By Beacon Staff

Record crop prices and farmland real estate values, tempered by soaring input costs, have brought into sharp focus the old adage “bet the farm” and led agricultural experts to recall the great farm economy crash of the early 1980s.

Following a recent report by the United States Department of Agriculture stating that the value of all buildings and land on farms has reached a record high, farming insiders and agricultural economists are urging caution. In the early 1980s, the value of farmland was similarly through the roof following a boom in crop prices in the 1970s. But high interest rates and overzealous farmers borrowing against the worth of their land led to an epic collapse.

“That was the worst time for farmers since the Great Depression,” said Ron de Yong, director of the Montana Department of Agriculture.

Though de Yong doesn’t expect a collapse of such massive proportions, he does speak apprehensively about upcoming years. He and others in the farming industry say about the only thing a farmer can bet on is that crop prices will drop. But input prices, especially considering their reliance on the oil industry, de Yong said, most likely will stay high. While the prices of wheat and other crops have reached record highs this year, so have the costs of fuel and certain fertilizers, doubling or tripling in some cases.

De Yong said farmers are taking out massive loans to cover the input costs, hoping the harvest will make up the difference.

“That makes the bank nervous too because they’re loaning out twice as much,” de Yong said.

According to the USDA report, Montana experienced one of the largest increases in farm real estate value from 2007 to 2008, with its per acre worth jumping 14.6 percent to $1,100. Nationwide the average per acre value increased 8.8 percent to $2,200. Farm real estate is divided into two categories, crop and pasture land, and includes all of the buildings on the land as well. Meanwhile, other sectors of the real estate market have plummeted.

The high value of farmland has driven up rental rates, so farmers who are renting land for cultivation find themselves in a tough predicament. Property taxes, however, have been mostly unaffected by the rising value, said John Youngberg, vice president of government affairs for the Montana Farm Bureau Federation, because taxes for agricultural land are based on production capability.

The immediate and most obvious contributing factor to the skyrocketing farmland value is the boom in crop prices. Farmers are taking advantage of the high profitability of their crops by buying up more land and expanding operations. Gary Brester, a professor in the Department of Agricultural Economics at Montana State University, echoed de Yong’s concern over what will happen when crop prices inevitably fall and farmers have so much money tied up into their operations.

“All of a sudden it’s: I’ve bought land based on this certain income stream,” Brester said, “and if this income stream isn’t here in the future it’s difficult to pay for the land.”

But economists, farmers and real estate specialists alike are quick to warn against giving too much credit to crop prices for high farmland values. Especially in regions like Western Montana, a huge factor for the inflated values is the effect of non-agricultural buyers who purchase the land for investment, not cultivation. Cal Scott, president of the Northwest Montana Association of Realtors (NMAR), estimates that today 80 percent of all land purchases in Montana are by out-of-state residents. And a growing portion of that land is agricultural, which, in Western Montana, is often located on the beautiful, fertile valley floors.

“We’re being viewed by the entire world and they’re coming,” Scott said.

Youngberg doesn’t expect average farmers to start getting into the real estate game despite the high value of their land. He said, “what’s going to preclude that is capital gains taxes.”

“People aren’t going to go out and sell willy nilly their land,” he said. “I’d like to tell you that everybody is going to make a lot of money on this, but that’s not going to happen.”

Also, as the baby boomer generation retires and fewer young people are looking to take on the family farm, combined with the evolution of more efficient machinery that decreases the number of people necessary on a farm, Brester said the face of agriculture is changing and that will carry its own side effects.

“That means whoever’s left there can operate bigger places,” he said.

Brester points out differences between the circumstances of the 1980s and today, as does de Yong. People have more real wealth now and interest rates aren’t as high. Also, Brester said that with more farmland owned by people without agricultural intentions, when commodity prices drop again, the value of farm real estate should stay more stable than if it was all tied up in cultivation.

Furthermore, Youngberg said everybody from the farmer to banker is more aware than in the 80s of the potential dire consequences of gambling too much on boom times. Brester isn’t so sure.

“Quite frankly, people usually overestimate,” Brester said. “There certainly are some similarities to the 80s. I can’t tell you if people learned from the experience in the 80s or not.”

Two constants generally agreed upon in agricultural circles today are: Crop prices are going to fall and even with high prices, farmers aren’t necessarily making fortunes for various reasons, including input costs.

But de Yong said those factors are all part of what he calls the “huge gambling game for the farmer.” He doesn’t foresee the game changing unless farmers begin looking more into alternative fuels like biodiesel, because dependence on the oil industry isn’t working. De Yong, who said he has seen grain prices soar like this only twice in his long farming career – 1973 and 1996 – thinks problems like stagflation could be on the horizon.

“If we don’t diversify into alternative resources,” de Yong said, “we’re going to continue to get caught in this cost-price squeeze. People don’t tend to think long-term.”

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