Despite all of the government aid given farmers to compensate for trade and pandemic losses, there is still some segment of ag industries where producers fail financially. The previous round of bankruptcies came from the dairy industry, as it experienced a structural shakeout not too dissimilar to what the hog industry went through before it. The dairy industry took a lot of government money to stabilize. What farm subsidies do is control or limit the number of those failing so that it doesn’t disrupt the nation’s cheap food policy. It has since been hard on grain/soy producers that were being sorted out with a protracted multi-year squeeze of their margins. Every once in a while, farmers have to make some ‘real’ money to be able to get through tough times. The recent “Ag Recession” for farmers did not reach the levels of stress created by the Ag Depression of the 1980’s in part because of the subsidy support structure created as a result of the Ag Depression. Aid checks to farmers and low interest rates made the difference. Despite that, not everyone survives protracted periods of negative profitability. That takes equity.

Iowa farm bankruptcies have reportedly risen to a decade long high. I know that puzzles some given newly profitable grain prices but many farmers went over the edge before being rescued. Those ‘high prices’ are still mostly headlines and not enough has been taken to the bank yet. They had not made any money for over 3 years and had refinanced to the limit. Low interest rates were not enough to generate profits given low prices for grain. Some who were short of working capital cut back on crop insurance coverage in order to save money and then along came the derecho and destroyed their crops. The late season drought lowered yields too. Others had hogs and cattle ready to market and then the packing plants closed from the pandemic. When packers took their livestock, they bid down hard and producers had no option other than to take losses or euthanize. They are still waiting for government aid for the latter. It was not a good year. Then when prices did begin to rebound, farmers needing cash flow, sold soybeans off the combine before grain markets soared. USDA did not tell them how poor 2020 yields were or how much China would buy until after they had sold. It makes little difference how high prices go when you have nothing to sell.

Variables for farm financial outcomes last year varied greatly. The amount of operating cash, local agronomic conditions, and the type of contracts livestock revenue was based upon determined the cash flow pressure that farmers were under. This generated a huge range of financial performances. Bankers were ready to pull the plug on operations that had not shown profits for multiple years. Imagine however if livestock and grain prices had not recovered. Instead of John Deere raising their sales outlook like they have, farmers would not have been able to buy much from them.

Now that grain/soy/wheat/cotton prices are all profitable, farmers who have survived can cash in… right? Good luck with that. 2021 should be a better year but it is also a La Nina year with all of the production risk that brings with it. There was a drought in farm revenue and many farmers who are the thirstiest have not gotten a drink yet. While cash flows have improved, they need to cash in before the balance sheets are repaired. There are many farmers who are still on the brink where their financial future in doubt.

They talk about wealth disparity in the U.S. The same chasm exists between farmers too. In fact it is just as wide or wider than for the country in general between farmers in the ag sector. Those that could buy land, while operations were unprofitable, from being deep in equity are the opposite of bankrupt. There are enough of them to get John Deere’s hopes up. The farmland market held up markedly well during the Ag recession as there is a segment of farmers with historical equity. The ag bankers had learned one major lesson from the Ag Depression of the 1980s and that was not to let the farmland market become over-leveraged. Weakness in farmland values never threatened the equity in farmland. Farmland was also a better investment return than CDs in a bank during this period of low interest rates. That limited the supply of farmland coming on the market and maintained the money flow going into purchases from buyers with cash. Now that prospects for operational profits have improved, farmland values have firmed again. What seemed like a high price for farmland a year ago at this time, isn’t so extended today.

Putting crops in the bin last fall, storing as I recommended, was part of my overview of the farm outlook. If you waited for USDA to give you the bullish news that crop yields were poor and China was buying, you were late to the opportunity. Much of the profitability would have been missed. I commented that you had to have an inventory to benefit from higher prices. I advised against making cash sales until recently. Farmers were selling 2020 crops early for many reasons. Some had to and others were still captured by the negative psychology. While there are farmers going bankrupt, for others this is a windfall. They must be the Deere customers. One of the objectives from this report is to move farmers upward in mobility on the wealth ladder. Some of it is not fair and it can take a lifetime to accomplish. When the market gives the opportunity to make money, you have to do what it takes to be in that line. The lessons learned come from decades of experience. Read Hiram Drache’s book ‘Beyond the Furrow’. History rhymes.

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.