Farm debt grows as agricultural economy weakens

There are mounting concerns about the direction of the farm economy. The U.S. Department of Agriculture expects farm income to fall for the third year in a row in 2016. At the same time, farmers are borrowing billions more from banks to get by.

The change in farm fortunes follows a drop in prices for corn and soybeans, the top Midwest crops. Supply and demand are both working against the commodity markets. Farmers have raised an oversupply of grain, while at the same time the slow global economy has brought down demand.

To make ends meet, farmers are giving up leases on farmland they can’t afford and selling equipment they don’t need.

At the Lee Valley consignment sale near Tekamah, Nebraska dozens of used tractors, planters, and other miscellaneous implements were on the auction block for farmers looking to make a deal or make a few extra dollars. It was a muddy day with trucks and four-wheelers leaving deep, black ruts. Fitting weather for an industry wallowing in bad news.

Amanda Johnson was at the auction. She and her husband Matt raise cattle and crops near Scribner, Nebraska. Johnson was hoping to save money on used fence posts because making money looks tough.

“It really depends on markets, really it does,” Johnson said. “I’d say even if you can break-even that’s doing pretty good for the markets right now.”

Colten Josoff has to supplement his farm income with a full-time job. Josoff, 23, farms a few hundred acres with a friend around Louisville, Nebraska, but he says the farm is too small to afford new equipment or make a full living.

“Granted, I would love to farm full-time but you still got to pay your bills,” Josoff said. “If you got to go get a job at McDonalds to pay ‘em that’s just what you’ve got to do.”

Josoff doesn’t flip burgers, he actually works in the ethanol industry. But economists expect more farmers to look for extra work to stay in the black.

With less income coming from the land, Kansas City Federal Reserve economist Nathan Kauffman says farmers are borrowing more to keep their farms afloat.

“We’re continuing to see pretty strong demand for farm loans. So that’s primarily reflecting strong demand for short-term cash flow,” Kauffman said.

Farmers are burning through the cash they stashed away during the recent good times, Kauffman says. Now they’re borrowing to pay for essentials like seed and fertilizer.

As a result, farm debt is projected to pass $372 billion this year. Adjusting for inflation, that’s the most farm debt since the late 1970s when the rural economy began to melt down. But Kauffman says today’s numbers are not a sign of history repeating.

One big departure from the farm crisis is interest rates, which remain near historic lows rather than the historic highs of the 1970s. That makes it less expensive for farmers to take on debt.

Also, land prices have not collapsed. The latest reports from fed offices in the Midwest show land values declining most places by a few percentage points in the final months of 2015, although some ranch land continues to gain value.

“So the fact that farmland values are holding up pretty well and farmland as an asset is by far the biggest portion of the farm sector balance sheet means debt-to asset-ratios aren’t rising too much because those values have stayed strong,” Kauffman said.

The debt-to-asset ratio is akind of a barometer for farm finances. Land is a farmer’s biggest asset. If his farmland is still worth a lot, he can sell parts of it to pay off debts and isn’t at-risk of default. Right now the debt-to-asset ratio is about 13.2 percent, up a few percentage points from recent years but low compared to 22 percent during the ‘80s farm crisis.

Jerry Catlett, a banker at Bruning State Bank in Bruning, Nebraska believes that’s a good sign.

“Like in the '80s you didn’t know if you were gonna have a farm sale come the end of the year. I don’t’ think we’re anywhere close to that,” Catlett said. “But that doesn’t mean there’s not a few exceptions out there where there might be folks looking at that right now.”

In other words, some farms might fail, but that doesn’t’ make it a farm crisis.

And that’s partially thanks to taxpayers. Government supports could provide a backstop for some producers. Farm payments are expected to payout thirty percent more this year than last year.

It may be enough to keep some farms from going under, but Scott Olson isn’t counting on farm payment programs to earn a living. Olson is an auctioneer at Lee Valley and also farms around Tekamah, Nebraska. With planting season coming up he says there will be a fine line between making money, and losing it.

“But, you know, you can’t just quit for a year. You’ve still got taxes to pay, and a family to feed," Olson said. "You’ve got to work and try to make it work."

Like other farmers across the region, he’ll plant his corn and beans and hope for the best. If you’re not optimistic, he says, you’re not a farmer.

Harvest Public Media is a reporting collaboration focused on issues of food, fuel and field. Harvest covers these agriculture-related topics through an expanding network of reporters and partner stations throughout the Midwest.