Warren Buffet once made the statement that “you get to see who is swimming naked when the tide goes out.” He wasn’t referring to the beach. The tide has been going out for a long enough period of time that negative cash flows will start to uncover how well farmer’s bathing suits hold up. Farmers have been building a huge inventory of grain, un-willing to sell at what are unprofitable prices, leaning on equity to pay bills. The financial disparity from farm to farm is huge.
There are farmers with their land paid for that are essentially “collecting income” and can buy the neighbor’s land if the opportunity arises. That is why land prices have not come down like corn prices or revenues have. They can have a longer-term horizon as they are not under financial duress. There is a generation of farmers, however, just getting started that never had time to build the equity they now need to live on and the margin compression is squeezing them hard. Like it always has, this is when family comes in handy.
I needed my dad in the 1980’s. This Ag downturn has not been as bad because land prices have supported balance sheets to sustain equity and interest rates are still reasonable. Back in the 1980’s when the farmland bubble burst, the Fed poured salt into the open wounds with soaring interest rates. This time when there was a financial panic over sub-prime mortgages for the non-farm economy, the Fed came to the rescue with low rates. I see favoritism there. I am still a little resentful.
I have been surprised that despite the slide in net farm income that farm equipment sales have done as well as they have. I wonder if that won’t bite some farmers yet. The income wasn’t there to pay cash and cheap interest rates were attractive. Also, the accelerated deduction allowed farmers to avoid taxes by buying new equipment. The problem with that is that the John Deere low could be deeper next year as farmers are going to have large needs for cash to make payments. Many have already restructured loans once and as long as there is equity there they will do it again.
The happy talk over lower tax rates will not mean as much to farmers who are seeing much smaller incomes. You have got to make money before a lower tax rate matters. Corporations will get 80 percent of the benefit from the GOP tax plan and they changed what Trump had promised on pass-through income so farms and small business are not treated evenly with corporations. This was bait and switch as farmers were promised the same tax rate on pass-through income as corporations during the campaign and that is not what is in the GOP bills.
Some have been expecting negative cash flows to impact crop inputs causing farmers to have to scrimp on fertilizer and chemicals but yields have not been impacted yet. Many farmers opted for cheaper non-GMO seed corn this year and from yield reports, that worked out well for them as there was little yield difference, not enough to pay for the extra traits. Each year will be different and this may not be the case every year or seed companies are in trouble. Those looking to minimize crop inputs will opt for soybeans.
There have been some high flyers that, as I put it, flew too close to the sun and got burnt from committing to unworkable cash rents that exceeded their loss bearing ability. High cash rents are transferring equity from tenants to landlords. Markets never gave stellar opportunities last year to market this crop. That is why farmers still own so much of it. All that farmers looking to convince landlords to reduce rents will hear now, is how great that their yields were. My view is that those yields will make a difference but are not enough to eliminate the margin stress which will continue to worsen.
The bear markets are likely to search for the weak players and eventually will find some. All the talk about how great the general economy is doesn’t apply to the Ag sector. Remember my tale of two economies? This is our turn on the bottom and it has not turned up yet. The tide is still going out. Hang onto your trunks!
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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