Farmers are not making money
Percentages can be misleading. Talk of 500 farm bankruptcies, a 90 percent increase from last year, attracted attention but there were over 11 times that many annually during the worst of the Farm Crisis of the 1980’s.
It wouldn’t sound so bad if they said that farm bankruptcies in 2018 were just 8.6 percent of 1987 levels. The way that I have put it is that the farm economy is at the precipice of a crisis but was still one good existential fundamental failure away from it yet. A surge in US interest rates and subsequent soaring dollar tanked a highly leveraged ag economy in the 1980s. We have a higher dollar and interest rates than we’d prefer today but neither are crushing things. More RFS RIN waivers or a breakdown in trade talks could push it over the ledge this time. Coming fundamental events will be important.
About 40 percent of farmers are so deep in equity that they do not even know times have gotten tough, 40 percent feel some pain but have the resources to adapt to it and the final 20 percent of farmers are struggling to survive.
Bankers tell me size doesn’t matter. There are some smaller dairy farmers who can no longer live poor enough to survive on one end of the spectrum and there are some large crop operations of thousands of acres who bid up cash rents and bought new machinery that their size only contributes to a larger failure in terms of dollars in bankruptcy.
The Kansas City Fed bank says that 15 percent of bank loans are now under ‘watch’. That number is 20 percent of farm bank loans in Nebraska…before the epic flooding. However, turned around, 98 percent of farm working capital and real estate loans are still performing.
The problem is that farmers are not making money. USDA says that the median average household farm income last year was a negative $1548.
Farm families are relying more on off-farm jobs to pay living expenses. Farm income is predicted to rise 8.1 percent this year, another percentage that disguises the true situation. Net farm income fell 17.8 percent last year and while 8.1 percent is an improvement, it should be known that that still leaves it at 50 percent of net farm income in 2013.
They estimate it at $69.4 billion and Ag Web says there have been six times since 1990 when it has been below $70 billionn. 2019 net farm income is forecast to be below the 91-year average by $15 billionn in adjusted dollars.
Trump was bragging to the American Farm Bureau Federation convention how net farm income was climbing under his administration. He is the consummate salesman and has been able to disable the b.s. detectors of over half of farmers.
How are farmers coping with negative cash flows? Those that own enough un-mortgaged farmland have reduced their land costs to be in that 40 percent of farmers who are doing well. Some in that cut see the weak ag economy as an opportunity to expand as pressure builds on rents and land values. The Iowa Realtors say that Iowa farmland values fell 2.7 percent last year. That is not a crisis…yet.
Cash rent payments were due March 1st for many and some landlords did not get paid on time. The tenant has opportunity to remedy, but this may be a sign that the rent was too high.
Years ago, landlords put skin in the game with crop share leases. That is rare anymore. They used to also wait to get paid until harvest in the fall when there was revenue. That is rarer too as landlords fear that tenants will not be able to pay high cash rents so want it all up front in March.
Competition for farmland allowed landlords to remove all of their skin from the game as tenants bet on the come. I cannot see where that has worked out very well on the backside of this ag cycle. High flyers are giving up land because the rents do not work. Rents have moderated but not enough to generate profitability for the average row-crop operation.
55.7 percent of farmers told a Farm Journal survey that they were worried about how they were going to pay back their debt. A Fed survey found that 42 percent of farmers are having to increase their debt to finance working capital. Feedstuffs says that 50 percent of farmers have no plans to grow and may downsize.
USDA estimates that Leverage at 15 percent today is much less than in the 1980s and the rise in farmland values generated a pool of equity that farmers are dipping into to refinance depleted working capital. The farmland itself was not over-leveraged as it was in the 1980’s. That has brought stability to prices as those with farmland, by and large, have not had to resell it to raise operating capital, which otherwise would put more pressure on land values creating the domino effect that farmland prices experienced in the 1980s.
As a general statement, farmers have still been good buyers of farmland, not sellers. No one likes to re-finance, but land equity is like having money in a bank and sometimes a withdrawal is necessary to pay the bills. Be glad that the equity is there. Those without it wish that they had it. That is why they are in the struggling 20 percent.
Net farm income is down despite several years of trendline and better crop yields. While there are no alarms going off yet over prospects for a poor crop year in 2019, but we all know that we are running on borrowed time for the next crop problem, hoping it is in Brazil, Russia or somewhere other than where we farm.
I see farming as a long-term proposition and would like to believe that the current ag economic weakness is a short-term problem and long-term opportunity. Unfortunately, the turn will depend more than we would like on politics…the RFS policy, trade wars getting won and immigration impacting farm labor being settled in the ag sector’s favor. We have a front row seat.
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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