Has the ag economy actually recovered?
In recent weeks there has been a lot written about how the “ag economy” has recovered and things are really looking up. Some would quote a recent Federal Reserve Bank’s Ag Letter that talks about the recent increase in land values. Or the fact the share of the District farm loan portfolio deemed to have “major” or “severe” repayment problems was 4.3 percent in the fourth quarter of 2020–lower than the share reported in any final quarter since that of 2014.
Another quote from the newsletter was “repayment rates for non-real-estate farm loans in the fourth quarter of 2020 were higher than in the same period of the previous year, which had not happened since the third quarter of 2013. At 133 for the final quarter of 2020, the index of non-real-estate farm loan repayment rates was last higher in the first quarter of 2013.”
Another barometer might be the increase in machinery prices in recent weeks. Machinery Pete reports record high prices on several different pieces of late model equipment. https://www.machinerypete.com/media–posts Still another indication of attitude is the Purdue Ag Barometer https://ag.purdue.edu/commercialag/ageconomybarometer/ in recent months although it has bounced around recently.
The USDA has weighed in as well with a forecast of U.S. Farm Income. In the report on page 57 https://www.ers.usda.gov/webdocs/outlooks/100526/oce-2021-1.pdf?v=6392.5 it states “After four consecutive years of increase, net farm income and net cash income are projected to decrease in 2021. Net farm income is projected to decrease $19.5 billion (16.3 percent) in 2020 to $100.1 billion in 2021. Net cash farm income is projected to decrease $22.4 billion (16.7 percent) in 2020 to $111.7 billion for 2021.”
It’s great to talk about averages but in agriculture most of the operations are not average. The income and debt for most farms don’t form some “bell shaped curve” but more often I think I see a “double hump camel” with those that “have” and those that “have not”. Those that are in the first group certainly enjoyed the benefit of the additional government payments and those in the second group desperately needed the payments. Those in the first group are the reason we are seeing those increases in land and machinery.
Those in the second group have been able to pay down some operating debt and hopefully service restricted debt. Hopefully they have been able to rebuild some “working capital” and get the “current ratio” in better shape. Farm debt is expected to reach $287.4 billion in 2021, a 3.1 annual increase. Farm real estate debt has risen each year since 2014. When you look at farm debt and focus on “operating debt” it doesn’t appear to have increased much. Then when you look at real estate debt you get a much different picture. https://www.ers.usda.gov/topics/farm-economy/farm-sector-income-finances/assets-debt-and-wealth/ The real story is that we have had a lot of farms that haven’t been able to service “operating debt” so they have “rolled” it down the balance sheet to the “real estate” portion of the balance sheet. You can do it once or maybe even twice but eventually your equity is gone. That is why the increase in land values is very important at this time.
My concern is that I am receiving calls from landlords wanting to know how much rents are going up and also hearing rumors of some new leases renting at very aggressive rates. Then we have DTN reporting a 17% fertilizer increase. So we have seen this before; an increase in profits and then a quick response by all of the input suppliers to capture some of those profits only to be followed by lower prices and a severe erosion of profit margins.
My message to landowners is that most tenants need several years of good margins to rebuild equity that their businesses have lost. If you were one of the farms with low or very little yield you don’t have anything left to sell at these higher prices. Family living expenses continue to grow with the increased health insurance costs.
If you are one of those that weren’t able to service your operating loans in 2020 consider calling on one of our farm analysis specialists. https://www.extension.iastate.edu/farmanalysis/ They can help you figure out where you are at today, where are you wanting to go in the future and how do you get there. They can help you generate a computer analysis of your current situation and strategies for you to consider as you move forward.
Kelvin Leibold is an Iowa State University Extension and Outreach area farm management specialist.
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