The Hueber Report
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A Look Forward Part II
Aug 02, 2014
A LookForward – Part II
What can past cycles teach us about future profitability? The research on the subject is vast. Two individuals from the Kansas City Federal Reserve, Jason Henderson and Nathan Kauffman, recently published a paper titled Farm Investment and Leverage Cycles: Will This Time Be Different? [i]. In the paper, they present a thorough look at the swings of the domestic Ag economy for the past century. Their research outlines the same picture as you see in the 100-year corn chart that I constructed showing major peaks in the farm sector after WWI-1919, WWII-1947, and the Vietnam War-1974/75. These are roughly separated by 30-year intervals. This pattern provided us with a target for a swing into new high levels of income shortly after entering the new century. While not precisely at 30 years, this is what was experienced from 2005/06 into 2011/12. Notable from Henderson and Kauffman’s statistics from 1915 to 1919, the prices received by farmers for all commodities doubled, peaking at an average net return per farm of $23,500. From 1940 to 1947, net returns per farm more than tripled from the lows, and by 1948 reached a new record of $25,000 net. From the late 1960’s into the mid-1970’s we again gained more than doubled, and in 1973 the average net reached $50,000 per farm which is also more than double the previous record. It should not be a shock to see that the net return to farms doubled again between 2005 and 2011. But it is interesting to point out that this time, the net fell short of the previous peak and topped out at $45,000 per farm in both 2011 and 2012.
The cyclical correlations do not stop with income either. As in each of the previous cycles, farm debt was reduced as incomes rose, but large investments were made in equipment, buildings, and land just as prices were peaking or leveling off. Consequently, debt ratios begin to move higher. As we are all aware, once the pendulum begins to swing, it does not move back in the other direction quickly. In the previously outlined instances, the increase in spending that took place during the "good" years did not catch up with the farm sector until prices leveled off. Once they had, the readjustments were stark and punishing to those who believed there was no end in sight to the growth. In 1921 alone, net farm returns fell 53%. While they stabilized and rebounded from there, it was not enough to stem bankruptcies, which increased sevenfold as opposed to 1920. By 1923, farm bankruptcies represented 1 out of every 5 bankruptcies in the US. The post WWII correction was not nearly as severe, as increases in farm debt were much lower than the previous period, but we still entered an era of over 20 years of very stagnant earnings. Many of us remember the downturn through the 1980’s, which is often referred to as the US farm depression, and by 1985 bankruptcies pushed up to 2.3 per 1,000 farms which eventually reached a pace that was double what they had been when the previous record was set in the 1930’s. It is interesting to note that during the expansion during the 1940’s the investment at the farm level was not in real estate but rather vehicles, machinery, and equipment. In 1947, expenditures for these items jumped 73%. Sound familiar? Since 2005, the average annual investment in farm structures has risen 50% above 1990 levels, and over the past decade capital expenditures on tractors are up over 40% compared with the 90’s.