Farm bust coming, especially for large producers

The U.S. Department of Agriculture predicts farmers will produce a record corn crop in 2016. I predict that 2016 will be historic for another reason. This year a “farm financial crisis” will become national news.

People over 50 may remember “farm financial crisis” from the 1980s, when an earlier land boom collapsed. Many farmers went bankrupt. Millions of acres of land were foreclosed on. Hundreds of banks failed.

2016 won’t repeat that history. The structure of farm society has changed, as has agricultural lending. Nothing this year from the farm sector will shake national financial institutions or the overall economy. Farm output won’t drop, food will remain cheap and ag exports won’t change.

But many farmers will go broke, more so among the top 10 percent with largest sales than among smaller operators. Many ag lenders will take large losses. Some will fail. Sales of farm machinery buildings will shrink. Farmers in good shape still may find operating credit scarce as stressed lenders become gun-shy.

This prediction is my own and is based on anecdotal evidence. Problems are not yet showing up in published statistics, although lenders say they are showing up in financial statements.

There are two reasons for this crisis: overspending on machinery and facilities, and bidding farmland prices to record levels.

Outlays and prices for farmland and machinery reached unsustainable levels. One reason is years of high crop prices. These stemmed in part from a cheap U.S. dollar, which makes our exports low-priced for foreign buyers.

Over a longer term, prices rose in virtually all commodities. Short-term, the cheap dollar boosted U.S. exports. But what some call a multiyear global “commodities supercycle” is the biggest factor, one affecting all commodity-producing nations.

Now global prices are falling and the stronger dollar is hurting producers.

This bust will be different socially from the 1980s because the structure of agriculture has shifted in response to that shakeout and to evolving production technology and marketing channels.

Farm production is more skewed now, with a few very large producers generating an even higher proportion of output. This is greater than land-ownership data shows, because most large operators rent substantial acreage in addition to land they own. These large operations, highly mechanized and highly efficient technically, are most at risk right now.

There still are moderate-size producers. Some are in trouble, particularly if they recently bought land. But many land purchases by smaller operators were financed within families. More of their equipment purchases were of used machines.

Coming years of lower prices will be hard on all crop producers but will punish the more capital-intensive and highly leveraged operators most harshly. The upshot is that a smaller fraction of family farms will face liquidation than 30 years ago.

Ag lending is not what it was in the 1980s, either. In the wake of widespread failures of independent rural banks 30 years ago, and in response to changed structure of producers, new lenders moved to cream off the largest, most capital-hungry farms.

Some new lenders were input suppliers who long had financed purchases of their own products. These branched out to make general operating loans.

Other specialized nonbank lenders sprang up, large enough to raise money directly in capital markets and skilled at using the economies of scale to focus on big loans. Some of these may be at highest risk. We have little history of how this sector will fare, because it is so new.

Traditional rural banks are not out of the picture, and many will be increasingly forced to write off loans. Some will fail. But most have diversified and have not allowed the levels of leverage on farm borrowers that was common 35 years ago.

These are reasons observers long downplayed the likelihood of another ag crisis. When queried whether booming land prices presaged another bust, our standard answer was, “Farmers are not as highly leveraged as they were in the 1980s, lenders are much more cautious in valuing farmland on balance sheets, and few land sales are seller-financed the way they were in the 1970s.”

That was true eight years ago and even four. But it no longer is.

In a boom, irrational optimism inevitably seeps into producer and lender thinking. The unsustainable run-up in land prices and overinvestment in new physical capital no longer can be unwound neatly. There will be blood.

If this particular farm bust will affect fewer families than those of the 1930s or the 1980s, and if it will not harm the national economy or financial system, why should the average person care?

Perhaps we shouldn’t. But just as the bust 35 years ago made front-page headlines over an extended time, the coming shakeout will be a visible issue in farm states. There will be appeals for greater federal income-redistribution to farmers than the modest $10 billion or so running now.

More broadly, while the bankruptcy of many large farm operations, losses to many farm lenders and lean years for farm machinery suppliers should not, in themselves, harm the national economy, the straw-on-the-camel’s-back problem does not have a probability of zero. There are many more negative uncertainties in the global economy right now. The collapse of the supercycle affects other commodity-producing countries and sectors that include much of South America, Canada and Australia. When the overall global economy is so dicey, any more bad news is unhelpful.

This prediction is based more on an educated gut instinct than data. Let’s hope I am wrong.

This story was originally published May 20, 2016 at 11:17 PM with the headline "Farm bust coming, especially for large producers."