Beyond farm skills, survival requires business acumen
By WES SANDER
A projection by USDA that farm profits will drop 38 percent nationwide this year is adding more gravity to questions about the future of farm finance.
From a long-range perspective, it's all just another spike on agriculture's boom-and-bust timeline, mostly a correction for last year's record commodity prices.
"When things are trending upward, you do well," said Steve Blank, extension economist with the University of California-Davis. "This year, we're just seeing the opposite. If you take a long-run perspective, where commodity cycles have gone up or down, things don't look so bad."
But this year, price dips are showing up uniformly across most commodities. And with two years of widespread price volatility added to a worldwide recession shrinking demand for U.S. farm products, discussion continues to simmer over whether the farm financial crisis of the 1980s is due to repeat.
An August report by USDA predicts lasting effects on agriculture from a long-term lull in foreign demand for farm goods. Low demand "is likely to lead to a reduction in U.S. agricultural exports and to constrain U.S. farm income and agricultural commodity prices for some time to come," USDA's report says.
Producers face uncertainties about credit availability despite being credit-worthy in the past. It's a situation seen most vividly in the dairy industry, where producers can no longer rely on efficient farm management to ensure decent returns.
It's in dairy especially that the question of credit availability "is going to come home to roost," said Paul Patterson, extension economist with the University of Idaho.
"Producers have to figure out how to be a low-cost producer," Patterson said. "It's not farming better, it's doing things different in business and finance."
An individual's ability to get credit now depends less on one's farm skills -- even one's borrowing history -- and more on one's business plan, Patterson says.
"There has been a pretty fundamental change in the financing of agriculture," he said. "(Lenders) make decisions based on ratios, on things that business people are concerned with. You've got to start thinking in those terms. You've got to go in with a plan and documentation.
"Farmers have to wear a lot of hats these days," Patterson said. "I've watched some very good farmers go bankrupt."
And yet, from a longer perspective, agriculture has grown more stable since the 1980s, when a bubble in ag real estate led to what's now called the greatest farm crisis since the Great Depression.
Farmers are not leveraged as highly as they were three decades ago, when producers more often borrowed against land equity, said Steve Blank of UC-Davis.
Land values soared during the 1970s, then Midwest commodity prices dipped. Farmers soon began selling land to help service debt, leading to a precipitous drop in land values during the 1980s. That's when lenders began demanding more concrete evidence of a producer's ability to service a loan.
The conservative approach to financing "has made agriculture much more stable," Blank said.
"You can't get big in a hurry," he said. "You have to earn it now. Farmers used to grow with their credit. Now they have to grow with their income."
Staff writer Wes Sander is based in Sacramento. E-mail: email@example.com.