The New American Farm Crisis

           I recently read that farm commodity prices are now sharply lower than they have been for the previous seven years. For the next several years, corn prices are likely to remain in the $4.00 to $5.00 range, down from the $7.00 prices farmers have become accustomed to.   This will push farmers into a multi-year pattern of low profit or no profit whatsoever, which will cause farmland values to drop. But the crisis, the economic dislocation which this will cause, will be much less severe than the disaster of the 1980s.  The reason is that is the 80s were a different situation.

            In the 80s, and in the hundred years leading up to the 80s, few farmers owned their own land free and clear. Nearly all land was always heavily mortgaged.  In a good year, the mortgage would be paid down a bit, and in an unprofitable year, more would be borrowed.  A farmer's wealth was determined by his equity position--his debt to asset ratio.  But throughout the 70s, commodity prices were so low that most farms had had little or no profit for several years, and had losses for some of those years.  Yet land prices had continued to climb because of aggressive investment by wealthy speculators who, faced with high inflation, needed  a place to park their money. They needed an asset that would hold its real value as the Dollar dropped.  And Iowa farm land was their top choice.

            So although a farmer might lose money every year and need to borrow to cover his annual losses, his net worth might continue to climb because of the increased value of the fraction of his land that he actually owned.  In one decade, Iowa land went from $400 per acre to over $2,400,  with some parcels selling for as high as $4,000.  A farmer might also borrow to obtain capital to buy out his neighbor, and many of them did, since it had become obvious that "any farmer who didn't get bigger would have to get out."  But this left the average farmer highly leveraged, and when land prices started to drop in the early 80s,  many farms were "underwater,"  as the land dropped to less than $1,200 per acre.   They now owed more than the farms were then worth, and they owed this money on "demand notes."   The banks could demand full repayment at any time, and did so as soon as they realized that the money owed to them was not secured by assets worth as much as was owed.  So farmers went bankrupt and farms that had been in the same family for a hundred years were sold at a sheriff sale.   And it would be another 15 years before land values recovered to their 1981 highs.

              But that won't happen this time. This time, commodities have been at record highs for seven years, and farming has been very profitable.   Land has gone up, to nearly $10,000 per acre in some areas, but it's the farmers themselves who have bid it up to that figure, and they have done so mostly with their own money, not with borrowed money.  And though farms have continued to expand in size,  most operators have expanded their operation by renting land, not by buying it. Mostly, farmers have used the windfall profits of these high prices to pay off the mortgage.  Seventy-eight percent of Iowa land is now held free and clear, and even the other twenty-two percent is not very heavily leveraged. At no point in Iowa history has this situation occurred.  They have also used the money to make long term investments in the largest and best tractors and combines and grain storage equipment.  That's why Deere & Co has had record profits for the last 13 quarters.  So most farmers are actually well positioned to weather any storm, even if it lasts a decade. And, having made record profits for 13 quarters,  the downturn won't really hurt Deere & Co, or other implement makers.

            The real casualties will be the workers employed to build farm equipment.  Even if farm income did not drop, every farmer now already has a brand new model of everything he could possibly use, so sales cannot continue at present levels, and layoffs may be unavoidable.  Yet such layoffs, should they occur, will not cause the disaster that they did in the 80s.  To use Waterloo, Iowa as an example, in 1980, tractor manufacturing was Waterloo's main industry, and almost only industry.  The John Deere plant employed 16,000 workers in the bargaining unit, 4,000 salaried workers, and at least 4,000 employed indirectly through contractors.  And all of these workers were well paid.  When the big layoff came in 1982, they laid off  workers back to 21 years of seniority--down to less than 4,000 workers.  But today, the plant has only about 2,400 in the bargaining unit, and since the union agreed to a two tier wage some years ago, they are not as well paid, in real dollars, as workers were in the 80s. Instead of earning a total package worth $30 per hour, it's more like $15.  One  high-wage job can support as many as four other local jobs as the money is spent and re-spent across the community. But lower wage jobs support few if any other jobs.  So if reduced demand for tractors causes layoffs at Deere, it may still be a tragedy for the workers involved, but it will not paralyze the whole county for 10 years--like it did in the  80s.