Minding Ag's Business
Not 1979 All Over Again
Farmers, economists and financial analysts continue to debate whether today's robust farm finances could weather a protracted downturn--something on the order of a possible decade of depressed commodity prices averaging $4 corn and $10 soybeans as USDA and others now forecast. In other words, did grain producers salt away enough reserves during their glory days of 2006-2012 to tide them over now that the cycle is reversing?
A recent USDA report gave the nation's 900,000 full-time farmers the best financial grades in at least 20 years, as measured by remarkably low debt to asset ratios (see "How Bulletproof Are Farm Finances?" on DTN's Farm Business page). But Kansas State University Economist Allen Featherstone sees many parallels to 1979 and cautions against over confidence. Among them: Interest rates are so low today, they could easily spike more than the 67% as they did in the early 1980s, again pressuring those young and commercial farms that rely so heavily on debt. Cycles that slash farm income and repayment capacity are the norm in agriculture, Featherstone adds, but the 1980s were particularly harsh. He says farmers average repayment capacity stood at a healthy 153% in 1979, but tumbled to a mere 16% by 1981 when commodity prices collapsed and interest rates soared on variable debts.
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Economists at the Farm Credit Administration stress "there's a lot we don't know for sure" about the distribution of debt and the health of individual farms, but parallels to the 1980s are very hard to draw, especially since lending practices and risk management bears little resemblance to today's practices.
For starters, much of the real estate market in some regions was seller financed in the 1970s, a habit without much underwriting rigor and subject to high default rates later. Very little seller financing exists today, and much of that is between family members. Another important factor many analysts overlook, however, was how repeated droughts in 1981, 1983 and 1988 compounded farmer woes when commodity prices had already tanked. Many simply kept refinancing their carryover debts, living off their equity.
The same debt debacle wouldn't happen today. Nine out of 10 acres of U.S. cropland are now protected by crop insurance, most of it with revenue protection not just yield loss. But such security wasn't available 35 years ago. Even as late as the early 1990s, crop insurance participation rates hovered about 30%. That left growers dependent on erratic and unpredictable federal disaster aid programs to make up the losses, often years after the fact. Congress also piled on generous Farmers Home Administration (FmHA) emergency loans without regard to repayment ability and with disastrous results.
New FmHA lending ballooned from $1 billion in 1974 to $8 billion by 1981, FCA Economist Steve Koenig recalls. "From 1975-81, FmHa supplied $34 billion in farm credits, much coming from economic emergency and emergency disasters loan authorities that by design were poorly underwritten or did not require ability of repayment or had no controls on how the money was spent," he says. That $34 billion in 1981 dollars would be worth $100 billion in today's dollars--"a considerable capital stimulus."
At the time, the General Accounting Office also worried that disaster loans were piling up too fast to be repaid. "Emergency loans are more risky than other types of farm loans because they are made to help farmers generate income to recover from losses rather than generate additional income," GAO wrote in a 1989 report to the House Agriculture Committee. "To maintain their normal earnings in subsequent years, farmers have to substantially increase their productivity and income to pay for the added expenses of principal and interest. Given this dilemma, it is questionable whether many of these delinquent borrowers will be able to repay this debt."
Koenig points out that "you don't pay off debts with assets, you pay them with cash flow." By this measure, he thinks today's farm financials have so far held up well compared to the 1970s aftermath.
Using a crude measure of net cash income to real farm debt (see chart), 2014's forecasted financials still look strong, Koenig says. The blue line shows that after peaking in 1973/74, real net cash farm income relative to debt loads fell steadily for a decade and bottomed in the mid-1980s farm financial crisis period in the 18% to 20% range. The red line shows the latest period, including USDA's forecast of a steep plunge in farm income for 2014. While down from a high of 45% in 2012, FCA estimates the 2014 ratio at about 32%, little to worry about--at least yet.
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