Problems in agricultural credit could escalate in 2010-2011 unless there is a rebound in net income next year, warns Dr. Danny Klinefelter, Texas A&M University professor and extension economist. The direction in interest rates and land values will be key, too, he states, but it really starts with net income. And if net income again proves weak, that could forecast further weakness in land values.
"The question is whether the drop in net farm income from $87 billion in 2008 to a forecasted $54 billion in 2009 is an aberation or the beginning of an extended downturn. If net farm income remains below $60 billion in 2010 and 2011, there will be problems. If it falls below $50 billion, the problems will be serious," he states.
He is deeply concerned the financial problems experienced by livestock producers in 2009 could escalate into wider credit problems for ag lenders in 2010-2011. "The reality is that there has been little involuntary exit from agriculture in the last four or five years," he says. "Unfortunately, extended boom periods tend to be followed by a cleansing period of about three years and a hangover effect can extend beyond that," he states.
Watching net income trends can also be a forecasting tool for land values beyond serving as a measure of the overall financial health of agriculture. Klinefelter notes that the ratio of debt to income flashed a warning as early as 1976 that forecast the eventual downturn in land values in the 1980s. The debt-to-asset ratio did not issue a warning until 1981. In 1976, the debt-to-income ratio exceeded 4% and rose to a peak of 13.1% in 1983 before falling back under 4.0 in 1987 (the year land values bottomed). The ratio did not exceed 4% again until 2002 but it fell back in 2003 and remained under 4% until 2009. The ratio is forecast to be exactly 4% for 2009.
I discuss the debt-to-income versus debt-to-asset ratio issue in my most current LandOwner Newsletter. If interested in seeing a copy of the LandOwner newsletter, just drop me an email at [email protected] or call 800-772-0023.
Meanwhile, if you're interested in Klinefelter's entire discussion on the agricultural credit situation, click here.