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Are northwest Iowa farmers being set up for economic fall?

Monday, April 28, 2008

At a time of record agricultural profits, concerns are mounting that American farmers could be edging toward a financial crisis not seen since the 1980s farm-economy collapse.

Soaring land values, increasing debt and a reliance on government subsidies for ethanol production have prompted economists to warn that what some describe as a golden age of agriculture could come to a sudden end. At risk are the livelihoods of thousands of farmers, the health of hundreds of banks and the vitality of an agricultural industry that has been one of the nation's few economic bright spots in recent months.

"We're in a very risky time, and yet we don't seem concerned about that risk nearly as much as we should be," said Barry L. Flinchbaugh, an agricultural economist.

The potential problem, economists said, is that strong demand for corn and other grains has caused prices to reach historic highs. That has led to record farmland values and steadily increasing debt as farmers borrow money to buy more land, finance the higher costs of fertilizer and seed and upgrade their equipment.

As long as the demand remains, good times for farmers should continue. But if demand falls, they could find themselves in a situation reminiscent of the early 1980s when the farm economy largely crumbled.

Among factors that could affect demand would be a change in the federal government's policy on ethanol subsidies, now estimated at about $6 billion a year, revisions in the farm bill that would lower support payments or an increase in the dollar's value, which would hurt exports.

Farm economists question whether the federal backing for ethanol will continue in the face of complaints that soaring corn prices are increasing food costs. Corn is used in most animal feed and is a key ingredient in myriad other products.

"U.S. energy policy has been friendly to ethanol in the last couple of decades. The question is, will it continue to be. It's running up food prices and that's causing pressure on Congress to limit mandates for ethanol usage," said Neil Harl, an emeritus professor of economics at Iowa State University.

The farm bill appears mired in Congress as lawmakers bicker with the Bush administration, which has threatened a veto if any increases in spending are not offset by reductions elsewhere. Congress' recent short-term extension to the 2002 farm bill keeps programs funded through April 25.

Flinchbaugh and others said the agricultural economy bears a striking resemblance to that seen in the mid-1970s, when a seemingly insatiable demand for U.S. crops drove up land values and farmers took advantage of their soaring equity to increase debt. When federal policy changed and demand suddenly dropped, land values and farm income plunged, forcing thousands of farmers to sell out and leading to the failure of nearly 300 agricultural banks.

Grain farmer Harlan Meier, 76, lived through the last two major farm economy downturns - the Depression in the 1930s and the 1980s farm crisis.

Even at a time of such strong prices, Meier noted that farmers are paying much higher prices for seed and nitrogen fertilizer, a product needed in abundance for fields repeatedly planted in corn. The increased costs and memories of the 1980s have made him hesitant to take on debt.

"I guess you could say there's an awful lot of concern in the rural communities and with some of the city people," Meier said. "I would think there would be a lot of cautiousness among farmers because most of the people can remember the '80s and I would think there's probably a lot of cautious people now on spending a lot of money."

Economists worry that farmers could be tempted to add debt due to the belief that high commodity prices would continue.

Those prices have been driven up by a strong demand for corn and soybeans from countries such as China and India, coupled with the needs of more than 50 corn-reliant ethanol plants built in the last few years.

The cash price for corn on the Chicago Board of Trade has soared from $1.86 a bushel in the 2004-2005 marketing year to the current price of about $6 per bushel. Soybeans were at $5.88 a bushel in 2004-2005 and now are at around $13.50.

As prices have climbed, so have farmland values. In Iowa, the nation's biggest corn producer, the average price per acre of farmland has increased 67 percent in the past five years.

"Land prices are increasing dramatically, and prices of grains are high just like the '70s," said Danny Klinefelter, an extension economist. "It concerns me a lot."

Harl, who has written extensively on the 1980s farm crisis, said the key is how much debt farmers take on, and it appears that amount is increasing significantly.

"The longer these higher commodity prices go, the more it will draw people in to borrow heavily to buy the land and that's when things get dicey," Harl said.

According to the U.S. Department of Agriculture, farm business debt is expected to reach $228 billion by the end of this year, an $8 billion increase from last year and a new record for the fourth consecutive year.

The government said much of the debt is driven by the need for new machinery, equipment and grain storage, as farmers strive to keep up with the increasing demand for grain.

The USDA says total farm debt is up 30 percent from 2003-2008.

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