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A bearish outlook for the ag sector

Headshot for Richard Smoley.

As most people know, the current farm economic situation isn’t great. But how bad is it?

Statistics don’t tell the whole story, but they tell part of the story. It’s essentially a tale of decreasing revenues, probably to be followed, as usual, by decreasing land values.

A report issued by USDA’s Economic Research Service provides a snapshot as of late 2019. Here it is in short: “After peaking around 2012, farm sector income declined while farm debt continued to rise. Farm real estate is no longer rapidly appreciating in value, and land prices have declined in some regions. Between 2016 and early 2019, interest rates rose—increasing the cost of borrowing for some farmers.”

Furthermore, in 2018 and after, net cash farm income fell below the 1970-2017 average for the first time since the Great Recession.

After a long rise from 1993 to 2014, farm real estate values have plateaued, and the outlook suggests that they may fall. As of 2018, farm real estate value (an average of around $2,500 per acre) exceeded what farmers could pay based on their net income (around $2,250 per acre). The last gap of this kind occurred during the Great Recession of 2008-10.

Although this is a steep drop from the golden years around 2012, it’s far from the crisis period of the 1980s. In 1980, farmland values were four times as high as the values that could be paid given net income.

The produce sector is better off than most. The percentage of farms growing “specialty crops, fruits, and vegetables” who were in “extreme financial stress” has hovered around 1 percent, which is close to the statistical average from 1998 to the present.

Worst off were the hog, poultry, and dairy sectors, where the percentage comes between 3 and 4 percent.

On the other hand, of all the regions in the country, the “Fruitful Rim”—an area encompassing much of California, Oregon, Washington, Texas, and Florida, where, as the name suggests, most produce is grown—has the highest production loan delinquency rates of any region in the country. This may reflect proximity to urban areas, where real estate values are more likely to affect farmland values, and where there is more job volatility.

Large farms (those with $500,000 or more in gross cash farm income, or GCFI) are showing the most stress. As of 2017, nearly 16 percent were in the red zone for debt-to-asset ratio, compared with only 8 percent in 2012.

Small farms (those with less than $100,000 GCFI) were the best off: fewer than 2 percent were in the red zone.
Why? Off-farm income. Farms in this category tend to rely heavily on someone with a job in town, who has a more reliable cash stream.

“Larger farms may be more financially vulnerable than smaller farms because they derive a greater share of their income from the farm and earn less income off-farm,” says the report. “It is possible that when farm income goes down, operators of large farms are more likely to need to borrow more to meet their expenses.”

Large-scale farms, incidentally, account for about 80 percent of fruit and vegetable production, according to another ERS report.

Another source—bankruptcy rates as reported in U.S. courts—paint a grimmer picture. U.S. family farm bankruptcy rates increased by 20 percent in 2019, to an eight-year high. And as we’ve seen, these bankruptcies are more likely to affect larger-scale farms, which can rely less on off-farm income.

Causes include the usual suspects: rising input costs combined with stagnant commodity prices, trade uncertainties, and increasingly volatile weather.

Richard Smoley, editor for Blue Book Services, Inc., has more than 40 years of experience in magazine writing and editing, and is the former managing editor of California Farmer magazine. A graduate of Harvard and Oxford universities, he has published eleven books.