Total U.S. farm debt divided by U.S. net farm income has reached a ratio of 5 to 1. These ratios were much worse during the debt crisis of the 1980s, but a ratio below 4 to 1 is needed for the farm economy to stay healthy.
The current ratio is a new high since 1985 and indicates increasing vulnerability for the ag sector.
The summer rally in grains/soy and livestock profitability boosted USDA’s net income forecast a few billion dollars, but the Titanic continues to speed through the icebergs with a thinning hull.
My concern is that the ag sector economy is vulnerable to any garden variety black swan event – surging in interest rates, dollar inflation, a trade war or some other unpredictable calamity.
The current farm economy would collapse under the same interest rates, dollar inflation and export implosion that tanked the ag sector in the 1980s. I still remember farmers lamenting that they didn’t think that “they” would let what happened happen. Not only did “they” let it happen, “they” made it happen.
This time is different. Ag banks are healthy so they can let farmers fail without having to step in to help Ag banks. They are trying to create rather than destroy inflation. We are talking about the Fed easing what has been extraordinary stimulus.
While they are talking about increasing interest rates they have not been that successful in stimulating the economy. That would take fiscal reform to accomplish and Congress has not been in the governance business. The Fed can add a couple incremental quarter point hikes but it would not take much for interest rates if increased significantly, to weigh on the economy again.
The burgeoning federal deficit will become more expensive to service with every rate hike. The reason the deficit has not been as much concern is that rates have been so extraordinarily low that debt service costs on federal debt have not increased over the past few years.
Farm financial health varies widely. The Farm Credit Service wants farmers to have $200 per acre working capital, equity of 60 percent or more, less than $200 per acre farm payments and taxes, machinery costs of less than $50 per acre and a cost of production for corn of $3.50 bushel or less.
Bankers are going to be concerned that they are getting accurate farm revenue and expense information from farmers.
I calculated my cost of production to be $3.50 bushel, which used $250 per acre land cost without any cutback on fertilizer, including some manure that has three years’ worth of fertility credited.
Fertilizer prices have fallen by a third, so is more affordable. I had recommended using fertility deposited in the soil bank for a few years, but now fertilizer prices are coming down and you do not want to overdraw your fertility account. I also expect to get a little value added income from ethanol plant investments to add to corn revenue.
Some farmers are debt free, while others will have to amortize and/or restructure short- and long-term debt to free up working capital.
We won’t have to worry so much about taxes. Donald’s puzzling plan to reduce our taxes to 15 percent would have no impact without income. (He must think we are all corporate farmers paying the corporate tax rate).
Right now a $3.50 breakeven on corn would lose about $100 per acre at current prices. Flex leases only help if the base rent is low enough when likely prospects are that the base rent will be what’s owed.
The farm bill price safety net is pretty much near worthless with loan rates set so low they do not suspend falling net income at a level that keeps the farm economy solvent. ARC payments will help this year, but are gone the next. PLC payments will rise, but few farmers elected for them.
The soybean market is trading closer to my breakeven on soybeans for next year than the corn market so I would expect that will incentivize more soybean acres. I will probably plant some soybeans next year after all, but will still favor corn as a contrarian.
My impression is that farmers in general were not as focused as they should have been this year on locking up prices that made cash flows work when offered.
I think that they will be forced to be more attentive to marketing next year and that bankers will be more focused that farmers are marketing as well.
Most farmers will discuss farm rents with landlords, but farmers won’t have the confidence to ask for the degree cuts that they need to ask for.
Farm managers are in favor of reductions, but also won’t recommend the degree cuts to landlords actually needed. They may take off $15 per acre from the rent and think they have made a concession when the ARC payment to farmers is estimated to decline $68 in our county in 2017.
If any of you get your landlord to lower the rent $68 acre we will send you an award for “Outstanding 2017 Cash Rent Negotiator.”
That is what you would need to do just to stay even to where lower prices intensify the need for a further reduction in rent.
My impression is that the seriousness of below-the-cost of production 2017 corn/soybean economics hasn’t fully soaked in yet.
The ARC payment was material in paying the cash rent the past couple years. Its loss in 2017 will be noted by bankers.
Low prices do cure low prices in part because not everyone makes it. There is also opportunity here for the farmers who have no debt.
David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.
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