U.S. farmers face some lean times

U.S. agriculture struggles with crop surpluses and a strong dollar “Low rates pushed ag markets and farmland beyond true value”

The American farm boom is all but over, and farmers will have to begin tightening their belts. Land values are down from all-time highs. Global surpluses have pushed corn and soybean prices below the cost of production. The amount of agricultural debt relative to income has ballooned to its highest level in three decades, just as the Federal Reserve raised interest rates for the first time since 2006.

While many growers remain profitable, the global commodity slump is increasing pressure on a Midwest economy that was largely shielded from the worst of the financial crisis by high crop prices and increasing land values. “The farm economy had a near-perfect five or six years,” built on record U.S. demand for cornbased ethanol in fuel, surging food purchases in Asia, and near-zeropercent interest rates that helped spur land investment, says Brent Gloy, an agricultural economist at Purdue University. With the oil slump eroding ethanol margins, as refiners use less of the additive, and a strong dollar reducing U.S. exports, the Fed’s decision last month to start raising borrowing costs “means there’s nothing left of the boom,” Gloy says. At the same time, sales are dropping for the likes of tractor maker Deere and seed supplier Monsanto.

Farm income tumbled in 2015 to $55.9 billion, down 55 percent from a record $123.3 billion in 2013, estimates the U.S. Department of Agriculture. Farmers’ debt in 2015 was 6.6 times larger than their income, up from 3.8 times a year earlier. That’s the highest ratio since 1984, when farm foreclosures were the most numerous since the Great Depression, government data show. The debt-toincome ratio is “like a warning light that goes on in your car,” says Allen Featherstone, an agricultural economist at Kansas State University. “You better pay attention.”

The U.S. crop glut may be worsening. Inventories of corn, wheat, and soybeans on Dec. 1 were bigger than they were a year earlier, the USDA said in a January report, as farmers kept their bins full waiting for better prices. A separate government report forecast record global wheat production. Even as surpluses keep prices low, demand for American farm exports is dropping. The strong dollar makes supplies from countries including Brazil and Ukraine cheaper for importers. With U.S. exports at a sixyear low and imports up, the nation’s trade surplus in agriculture will slump to $9.5 billion in 2016, down 78 percent from a record $43.1 billion in 2014, USDA data show.

Compounding the strain are higher borrowing costs, which make it more difficult for farmers to finance operations or purchase land and equipment. The Fed raised interest rates by 0.25 percentage points and signaled its intent to make further increases. Cheap loans and high crop prices had helped fuel a boom in the price of U.S. farmland, with values doubling over a decade.

Maybe it was too much help. “Low rates pushed ag markets and farmland beyond true value,” says Jim Farrell, president of Omaha-based

Farmers National, which manages more than 5,000 farms and ranches in 24 states. Rising interest rates could reduce farmland values by as much as 15 percent within two years, he says. Rural bankers are getting more bearish, according to the Rural Mainstreet Index created by Creighton University from a survey that measures attitudes of lenders across 10 Midwestern states. Its gauge of farm and ranch land prices sank to 28.8 in December, the 25th straight month below a growth-neutral rating of 50.

Could land then become more affordable for farmers thinking of expanding? No such luck. “Land prices are down very little relative to the drop in farm income,” says Dan Kowalski, director of research at CoBank, a cooperative member of the Farm Credit System in Greenwood Village, Colo. “As the liquidity situation for farmers changes, buying farmland will become a more difficult decision.”

Because of the fat years, farmers probably won’t see the same kind of economic crisis they did in the 1980s, says Paul Pittman, chief executive officer of Westminster, Colo.- based Farmland Partners, a real estate fund that owns about 108,000 acres across the U.S. Most are in better shape financially after years of high prices, and the interest rate increases so far are relatively small.

For Anthony Bush, who farms more than 1,400 acres of corn, soybeans, and wheat outside Mount Gilead, Ohio, higher interest rates are just another sign that the mood is shifting. “I look for a period of pretty tough times,” says Bush. “I need to borrow money in the spring to cover the costs I pay off in the fall, so when you’re buying your seeds, your fertilizer, you have to take on your debt all at once.” Even with those increased costs, he expects farming to remain viable. “If you want to stick in this business, you have to be an eternal optimist,” Bush says. “We may not have cheap interest rates. But we’ll still have to eat.” The bottom line This year will test the mettle of U.S. farmers as the boom that drove land values and crop prices sky-high comes to an end.