Bulging debt load burdens farmers
Farmers in the U.S. may be in a more precarious financial situation than the official statistics indicate, according to a farm economist.
“We’re showing a lot more debt than what the USDA does,” said Allen Featherstone, an economics professor at Kansas State University.
Financial surveys of farmers by USDA probably do a good job of capturing information about intermediate- and long-term debt, he said.
However, the agency’s questions may not elicit accurate information about short-term debt due within a year to “non-traditional” creditors such as suppliers of seed and fertilizer, Featherstone said.
“They probably don’t have a true picture of the current liabilities,” he said.
Featherstone arrived at this conclusion by comparing the debt-to-asset ratios that farmers report to the USDA with data compiled by KSU.
While the USDA’s surveys show the debt-to-asset ratios hovering between 11 percent and 18 percent over the past decade, KSU recorded a range of about 21 percent to 36 percent.
It’s possible that when USDA asks farmers about debt, they reply with information about traditional loans provided by financial institutions and not accounts payable for farm inputs, Featherstone said.
Such short-term debt can account for 30 percent to 40 percent of their total liabilities, he said. “It can add up.”
An economist colleague at the University of Illinois has found a similar disparity between USDA data and that university’s data, Featherstone said. Debt levels, he said, are probably higher than estimated by USDA across the country.
Mitch Morehart, an economist at USDA, said the gap may also be related to statistical methods — the agency and the universities may adjust differently for incomplete or missing responses to questions about debt.
The agency is working with the researchers to resolve these issues, he said. “We’re always looking for ways to improve how we do it. If there’s a way to do it better, tell us.”
Liability levels are important because a sharp drop in revenue would likely have a greater initial impact on the repayment of short-term debt, before intermediate- and long-term debts were affected, Featherstone said.
“If we start getting into financial trouble, it would first show up on the current liability side of the balance sheet,” he said.
That scenario is unsettling in light of recent drops in commodity prices — particularly corn, which traded at above $7 per bushel last year and is now hovering above $4 per bushel.
Significant drops in crop prices dent overall farm production value and undermine farmers’ ability to repay debt, particularly if interest rates increase and subsidies are cut, Featherstone said.
“I don’t think debt is going to drive another bubble, but it could make it worse,” he said.
When asked if it’s possible that U.S. agriculture could face a downturn akin to the slump seen in the early 1980s, Featherstone said, “It’s not unthinkable.”
The outcome will depend on whether crop prices continue to fall and how quickly that happens, he said. A more gradual decline would give farmers time to adjust by cutting expenses.
Growers’ recent expenditures have been high due to tax incentives and solid profits, so they have room to cut spending — of course, this wouldn’t be good news for farm machinery sellers and other suppliers, Featherstone said.
The reversal in investor sentiment about crop prices, which had enjoyed a prolonged rally in recent years, is primarily the result of increased production.
Global farmed acreage, which had been in decline, began rising again in 2007, he said. High prices also drove farmers to invest more in fertilizers and chemicals, boosting yields.
“There’s a global supply response,” he said.
Commodity crop farmers will face narrower margins, but the lower prices are a reprieve for dairies, feedlots, hog producers and poultry producers, said Stephen Gabriel, chief economist for the Farm Credit Administration, which oversees a government-sponsored network of farm lenders.
“They’ve been hurting due to the very high grain prices,” Gabriel said. “While they’ve been stressed, the grain producers have been doing quite well. Now the tables have turned.”
Some farm loans will “fall out of bed” if another bumper crop drives down grain prices more in 2014 and interest rates rise, but Gabriel said he doesn’t expect crisis-level credit deterioration among crop producers because they’ve had time to build up cash reserves.
“We’ve got a little cushion to work with, as far as any correction in the farmland market,” he said.
Lower grain prices will also be felt differently in the Northwest than in the major commodity crop regions in the Midwest and Plains.
Aside from grains, farmers in the Northwest produce fruits, nuts, grass seed, nursery stock and other crops that aren’t as susceptible to swings in the commodity markets, said Bob Boyle, regional vice president for Northwest Farm Credit Services.
“We have a very diverse agricultural mix here,” he said.