If the definition of farm financial stress is the inability to meet debt service payments, including principal and interest, is there a chance you will be financially stressed in your operation in coming years, if you aren’t already? Farm debt is building at a rapid rate, and that is raising questions about the potential for farm operations to face financial stress in the future.
The potential for farm stress flag is being raised by the chief ag economist at the Federal Reserve Bank in Kansas City. Brian Briggeman, author of the recent Main Street Economist , says in the past six years, farm debt has risen about 5 percent per year and that equates to the period prior to the early 1980s.
And he says stress is identified by level of debt, cost of interest and the amount of farm income available to meet principal and interest payments. Since the national economic meltdown, we have heard that agriculture has done a good job to escape recessionary problems because debt is low and income has been high.
But Briggeman says some operations have seen incomes decline and left with the inability to address debt service.
What operations are those? Were they on thin ice initially? Were they primarily grain operations or primarily livestock operations or those with a diversified commodity mix? Were they small, large or medium, or those with young operators and two off-farm jobs to make it all come together?
Briggeman says the increased debt is the result of real estate and the operators vary in size, enterprise and age. The debt he has been tracking has risen from 2003 to 2009 and has been on farmland, because of the surging value of farmland. It went up 40 percent in that period of time.
The debt is not shared across the board, and only 30 percent of producers reported debt in 2008, compared to 60 percent who had farm debt in the 1980s. Briggeman says, âThe recent rise in debt has been concentrated among large farming operations with more than $1 million in sales.
From 2004 to 2008, total real farm debt, as measured in constant 2005 dollars, doubled for large farming operations, rising to $60 billion.â While those were only 5 percent of farms, their share of the debt rose from 15 to 30 percent.
Not unexpectedly, purchased farmland has put crop producers front and center, holding half of total farm debt. Livestock operators only saw their debt rise 5 percent, while crop producers saw their debt rise 35 percent.
The other group with high debt being recorded is those farmers under 35 years of age. Their share of farm debt rose 40 percent as they borrowed to begin farming.
Recent years have seen high grain prices and low livestock prices, which would have led one to believe crop producers had retired their debt and livestock operators may have taken on more debt. But that was not always the case.
Briggeman says in 2008 most operators had low levels of financial stress, including larger operations and crop operations, which were all able to service their debt at the time. But rising grain prices in 2008 increased incomes, pushed land purchases and increased debt loads.
At the same time, high feed costs and weak livestock prices diminished incomes for operators and one-third faced severe financial stress, causing some to shift their focus.
Briggeman says when the potential for stress exists, and the financial system is shocked with either a rise in interest rates or a drop in income, farmers would not be able to address their debt.
Large farms, he says, would have the ability to absorb the shock of increased interest. Livestock operations would be able to handle the higher interest as well, because very few of those that remain are financially challenged. Younger operators would certainly feel the blow to their income, which is already one-third less than other producers with debt.
If the shock were diminished income, Briggeman says a 30 percent drop would see young farmers and livestock operators suddenly in the high-stress category. Large grain operations would have more cushion than the others.
If both interest rates rose and incomes diminished, Briggeman says there would be significant farm financial stress, and compared it to the early 1980s. He says livestock producers and young farmers would face the worst of the stress because their weak net income would not be able to absorb the shock. He says over half of each group would be unable to satisfactorily service their debt.
Summary
Rising farm debt, particularly among larger crop farms that have purchased high-priced farmland, may be increasing their potential for financial stress. A sudden rise in interest rates, sudden drop in income or both would result in the reduction of a larger number of farms to make debt service payments.
Livestock operations, which have been diminished by high feed prices in recent years, and young farmers who have large debts from start-up costs, are also at risk. PD
âExcerpts from the Farm Gate: Farmgateblog.com
Stu Ellis
Editor and Blogger
farmgateblog.com
Stu@farmgateblog.com
