So far the agriculture sector has seen relatively little impact from the current financial state of the country. Monday the market rebounded with record single-day gains after last week's disastrous week and Tuesday started off strong as well. But volatility continued this week.
Today it's a question of how long the economic trauma continues. "This will eventually hit ag lenders if it continues long enough," said Neil Harl, Iowa State University agricultural economist..
"These are difficult times, even if the agriculture sector isn't in the eye of the storm," Harl said. In the mid-70s the rest of the country was in a recession, and soon after agriculture was in the tank too, explained Harl of the 80s farm crisis.
Farmers' balance sheets are stronger today than 25 years ago, but debt is never distributed evenly over all producers or borrowers. Harl explained problems arise when people with the heaviest debt load get themselves into a jam. Even though the distribution of debt average may look good for the ag sector, if 2/3 of the debt is in the hands of 1/3 of the farmers, a few bad loans can wipe out agricultural banks.
In the 80s, Harl explained half of the farmers were debt free. "It is vital to watch the distribution of debt as we head into the period that could cause greater impact on the ag sector," he said.
One of the biggest concerns for agriculture is whether grain buyers and small cooperatives are going to have enough financing to handle commodity movements into commercial channels this fall.
Lenders are already tightening up on inventory financing. Harl said with the massive amounts of money now involved in commodities, farmers could see a delay in payments this fall if the financing problem persists through the later part of harvest.
Farmer advice
Farmers may not feel a pinch until they begin to start financing the 2009 crop. USDA projects expenses are projected to rise 16% next year. Adjusted for inflation, the costs will be the highest since 1980 when the ag crisis hit.
Farmers need to play smart and protect themselves, Harl said. It is wise to stay addressed with the different efforts the government is rolling out to attempt to address the situation.
In addition, "stay close to one's lender," Harl advised. Know what your borrowing needs are and don't spring any surprises on your lenders. It's important to line up credit early and provide good records and justification for repayment.
Harl also suggested caution in expansion - both land and equipment. "Evaluate every major investment on a worst and best case scenario and something in between. If the current financial situation does last longer than anticipated, you won't put yourself in a difficult position," he said.
Land value declines aren't in the cards right now, but could be if volatility continues. Harl suggests farmers and investors not take on risks they can't handle.
Land values at their peak in 1981 were averaging $2,147/acre in Iowa. Today the average is closer to $4,000/acre with some sales reaching as much as $10,000/acre. Unlike the land crash of the 80s, today more land sales involve more individual net worth than in the 70s with less borrowing, Harl explained.
The sharp decline in commodity prices also causes concerns. At $16 beans and $8 corn, if you capitalize all nets in land values you can justify buying land at elevated prices. "However, it's not wise to capitalize the full amount because prices are unlikely to remain that high due to receding investments by speculators and partly because of the general fear gripping all the markets today," Harl said.
More insight
How the current financial crisis impacts agriculture and changes decision-making for producers is the focus of five new reports prepared by members of the University of Illinois Department of Agricultural and Consumer Economics.
The five-part package is available on University of Illinois Extension's farmdoc website or available by clicking on the title below.
Policy is one of the most important issues facing farmers today, but often the most difficult to digest. Jacqui Fatka has a passion to decode the often difficult world of agricultural policy into terms understandable for today's ag players.
Fatka joined the Farm Progress team as E-Content Editor in August 2003 after graduating from Iowa State University. Prior to full-time employment with Farm Progress, she interned at Wallaces Farmer magazine, Iowa Sen. Chuck Grassley's press office and the Iowa Pork Producers Association and freelanced for National Hog Farmer. She also worked as a public relations consultant with Iowa Industries for the Future, an effort to bring together major players in the biorenewables industry.
Currently Fatka is a staff editor at a sister publication, Feedstuffs. For Farm Futures she regularly tells the story of ongoing agricultural policy changes. Her byline can also be found on management profiles.
Fatka grew up on a grain and livestock farm near Atlantic, Iowa. She currently lives in central Ohio with her husband Eric.
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