Economists are watching the numbers from the farm economy closely, wondering if this latest downturn in prices will send the industry into a spiral similar to the one experienced in the 1980s.
Whether it’s harvesting grain, milking cows, or feeding cattle, 2016 has been a challenge. Prices across the entire sector spent much of the year in the tank, equipment sales were spotty at best and farmers pulled back on inputs here they could.
“As we looked at 2016, we heard a lot of anecdotes and saw in the data more carry-over debt going into 2017 and a significant amount of debt being restructured,” said Nathan Kauffman, economist with the Kansas City Federal Reserve Bank.
Farm economists are keeping a close watch on ag debt. The projected 2016 debt-to-asset ratio is forecast to rise to 13 percent. In comparison, the ratio in the mid 80s was more than 20 percent.
“When we look at the farm sector for the U.S. overall and we go back and look at aggregate data going back to the 1980s, we know that there were a lot of bankruptcies and it occurred at a time that there were a lot of bankruptcies,” said Kauffman.
But so far, economists say this isn’t the 1980s.
“There are some substantial differences between now and where we were in the 1980s,” said Bob Young, chief economist with the American Farm Bureau Federation. “One, we had a lot of debt that was held by individuals or folks outside of the lending institutions in the 1980s.”
Those family and friend lenders were often making decisions with their hearts instead of a business plan.
“Those were folks [who] would let you drag on or hang on as opposed to now; it’s farm credit or commercial banks are really the holders of farm debt at this time,” said Young.
There are clouds on the horizon.
“The number of loans or the proportion of loans where the collateral that we’ve used to secure that note has been the land of the farm itself and that took a very significant uptick in 2016 and that concerns me,” said Young.
“To the extent that farmland holds up pretty well, that can help soften some of the downturn,” said Kauffman. “If we were to see pressure in the land market, if we were to see more signs of forced sales and if we’re to see signs that the land market was starting to slip more, that would leave one with a more pessimistic outlook going forward.”
A recent survey of land values in Iowa shows farmland prices down in 2016, off nearly 6 percent.
“This represents the farmland prices have been declining three years in a row,” said Wendong Zhang, an extension economist at Iowa State University. “This is the first time that’s happened since the 1980s farm crisis.”
While these economists are raising the warning flags, none of them say it’s time to give up or get out.
“Things are in firm hands, but we’re going to have some that probably are going to roll back the size of their operation,” said Bill Northerly of Iowa Ag. “The vast majority out there are looking for ways to be more efficient and be able to make money in 2017.”