One hallmark that separates today’s golden era from the 1970s is low debt, because so much of the expansion and equipment purchases have been paid for with cash. Additionally, high profits have been used to reduce debt levels, right?
Wrong, to a point, in the view of Allen Featherstone, ag economist at Kansas State University. Kansas farm management association data show that in 1979, the debt to asset ratio was 24.6%, but 26.8% in 2010.
"We have higher leverage now than 1979," Featherstone said at the recent Federal Reserve Bank of Kansas City’s Agricultural Symposium. Illinois farm management data concurs. Featherstone further said that it’s a myth that farm balance sheets are the best ever today.
More farms also are carrying a higher percentage of debt than 1979. Farms with greater than 40% debt to assets was 25.6% in 2010 compared to 19.4% in 1979, while farms with greater than 70% debt to assets was 5.9% in 2010, while just 1.3% in 1979, Kansas farm management data show. "Things are not that different from the 1970s," Featherstone stated.
Over the past eight years, the debt to asset ratio has been reduced from 36% to 26.7%, he acknowledged, an obvious improvement. "The financial situation is better than eight years ago, but not so much better that we have removed all the risk." There is a huge discrepancy between farm management association data and USDA, however, with USDA showing substantially lower farm debt levels.
Featherstone is skeptical of USDA data, but was hard pressed to explain why farm management data in Kansas and Illinois and USDA data are so dramatically different. He doubts that producers in farm management associations are more highly leveraged than farmers at large.
Is a repeat of the early 1980s possible? "Yeah, it’s possible. Is it likely? I don’t know." He said that if world demand remains strong for feed grains and oilseeds as it presently is, and if ethanol demand remains strong, producers won’t likely experience bargain basement prices. But if several black swan events occur at the same time, low crop prices could happen again, making producers and their farmland vulnerable."
If this present golden era of agriculture goes sour, "a bust would more likely be caused by a drop in revenue than an increase in interest rates," in Featherstone’s view. Right now, he said, "the financial situation of the farm sector is in very good shape. It’s not the case, however, that farm balance sheets are better than ever." For instance, in 1973-75, and 1979, farm balance sheets were more healthy than today.
Featherstone said that despite all the talk about low interest rates, in fact, the real cost of money—factoring in inflation—is actually 4.67% now compared to 2.4% in the 1970s. Not factoring in inflation—interest costs were 11.04% in the 1970s, but about half that, 6%, during 2009-10. "Money isn’t quite as cheap when you adjust for inflation," he said.
Featherstone cautioned to beware of what he called "the tails," the extremes of loans and farmland sales. In the 1980s, for instance, it was only 10% of bad loans that drove the crisis. Moreover, on average, 3% of land turns over in a year. "If 6% of land comes on the market, that’s huge."