Large Farms Hold the Most Debt
Except for a brief period in the early 1990s, the percentage of farms with debt has fallen and the share held by large farms has risen, reports Robert Dubman of USDA’s Economic Research Service. In 1988, farms with more than $250,000 in gross income represented 8% of farms and held 32% of the debt. In 2007, those numbers changed to 23% of farms and 60% of debt.
“Operations require a larger line of credit because of rising input prices and higher cash rents, but now prices for production have fallen, creating a squeeze,” adds Paul Ellinger, University of Illinois ag economist. “It will be interesting to see what happens next year.”
Possibly adding a complication to that squeeze is falling land values. “Lenders normally have some equity requirement such as 20%, depending on the operation,” says Jim Kielkopf of AgriBank. “When prices are high, it’s easy for banks to take the risk of getting outside the requirement. Now, with prices down, they may return to safety.”
Whether more farms will return to using debt as an input if the economy does not quickly rebound remains to be seen. “Current low interest rates encourage it,” Dubman says. “But caution is needed. Large farms with the most debt could face solvency problems.” —Linda H. Smith
Choose Your Battles
Farming has always been a gamble: “Plant…hope crop comes up…produce…sell for a profit,” commented one respondent to a survey of Top Producer readers last month. “But the input costs versus selling price, along with the tremendous cost of machinery, makes that gamble a much higher risk today. I don’t believe a farmer makes more net profit today, just handles more money. But it is a really great way to make a living.”
It’s not possible—or even desirable—to control every business risk you face. However, you should make informed and logical choices about which you accept, which you manage and which you sell to an insurer. As the graph below shows, in our survey, 77% of readers reduce price risk through forward pricing or using futures or options. More than half seek to reduce input price risk the same way. See “Risk Audit,” page 22, for a list of risk categories and how one grower deals with them. —Linda H. Smith
“An unemployed worker is a lost opportunity. Like an empty seat on an airplane, the economy can never get back the value lost.” Robert Frank, Cornell University
Top Producer, September 2009
