Economists Don't See Farm Crisis

Bankruptcies, Loan Delinquency Rates Don't Reflect Ag Economy in Distress

Chris Clayton
By  Chris Clayton , DTN Ag Policy Editor
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Farm economists question whether the financial stress facing farmers is as bad as portrayed in the media and by agricultural groups seeking to boost subsidies to producers. (DTN/The Progressive Farmer graphic)

OMAHA (DTN) -- As complaints about financial stress for farmers rise, some economists say the data doesn't show today's farm economy is in a crisis.

Joe Glauber, a former USDA chief economist, and Vincent Smith, an economics professor at Montana State University, co-authored an op-ed for Dow Jones news service that challenges the argument that American farmers are facing a crisis. Glauber and Smith are both visiting scholars at the American Enterprise Institute.

In the op-ed piece published Tuesday, Glauber and Smith challenged media portrayals of farmers struggling to make ends meet, stating: "The plight of American farmers always makes for good copy, even when the facts don't match the rhetoric. And when media reports suggest that farmers are about to face a financial crisis, based on one or two pieces of cherry-picked data, farm interest groups rush to Congress to ask for more subsidies, on top of the $20 billion a year already being given to crop growers."

The op-ed comes as the National Farmers Union called on Congress and Agriculture Secretary Sonny Perdue to improve the safety net for farmers. NFU noted more farmers "are facing significant financial stress."

The economists claim farm groups are willing to use "hyped information about farm bankruptcies" to push arguments for more commodity support. The op-ed points out "... Groups representing corn, soybeans, wheat, pulses and cotton growers have all complained of inadequate subsidies in recent months."

Still, a broader look at economics shows there is no crisis, the economists stated. Farm bankruptcies are higher than they were a decade ago, but bankruptcy filings in 2018 were lower than 2010 and 2011 and about the same as 2012. The number of farm businesses has remained relatively stable since the 1980s.

This back and forth about the state of the agricultural economy comes as Perdue prepares to testify Wednesday before the House Agriculture Committee on his take on the state of the farm economy. Perdue also testifies Thursday on farm bill implementation to the Senate Agriculture Committee.

LOW BANKRUPTCY NUMBERS

Nathan Kauffman, vice president and Omaha branch executive for the Federal Reserve Bank of Kansas City, highlighted bankruptcy data last week at the USDA Agricultural Outlook Forum. Delinquency rates for farmers rose to 4% in 2010, coming off the 2008-09 recession, despite stronger farm income that year, Kauffman pointed out. At the moment, delinquency rates are closer to 2%. Kauffman noted the higher delinquency rates and bankruptcies in 2010 occurred in the middle of biofuel expansion and growing demand from China. Further, more than 700 farmers filed Chapter 12 bankruptcies in 2010, but the total is closer to 500 today.

"Even though there's been a slight uptick in bankruptcies the last couple of years, it was much more notable coming out of the recession than it has been coming out of this relatively long downturn in agriculture," Kauffman said.

Broad changes in macroeconomic conditions can significantly affect every industry in the economy. Kauffman pointed out risks to farmers because of projected declines in global growth. The International Monetary Fund reduced its forecast for the global economy for 2019 from 3.9% growth to 3.5% growth. There are also concerns about the status of U.S. trade policy and the prospect of rising interest rates.

CONCERNS OF FINANCIAL STRESS

Sen. Charles Grassley, R-Iowa, told reporters in a phone call Tuesday that he's hearing from Iowa bankers about the agricultural economy, but said Iowa is facing fewer problems than farmers in neighboring states such as Minnesota, Nebraska, South Dakota and Wisconsin.

"We are starting to see warning signs that farmers are running out of leeway with their bankers and landlords," Grassley said. "The sooner the department can implement the farm bill, the better. In other words, farmers need certainty."

Grassley said he's read about some states reporting a 50% increase in bankruptcy compared to 10 years ago. "I don't know what that figure means," Grassley said, then added, "But it all comes because of low commodity prices."

Grassley said he has heard from bankers about Iowa farmers facing more stress, but not so much on bankruptcies in his state. The biggest change Grassley has heard from bankers about is that farmers have to put up collateral, or more collateral, to get loans.

Roger Johnson, president of the National Farmers Union, pointed to the declining numbers of dairy farmers. Bankruptcies are up in Wisconsin, for instance, where the Milwaukee Journal Sentinel just published articles last week highlighting the crisis in dairy farming. Among the figures reported in that Journal Sentinel series were that Wisconsin lost almost 700 dairy farmers last year and has seen a 40% decline in dairy herds over the past decade.

To read the series, visit: https://www.jsonline.com/…

"There's a lot of emotion attached to what is going on with dairy right now," Johnson said.

Public policy does not do a great job recognizing some fundamental economic facts in agriculture, Johnson said. More emphasis is placed on rising production numbers than the number of farms producing milk.

"Just because we continue to lose farms, we're not losing cows, or even if we do lose cow numbers, the production per animal continues to go up and we keep producing a lot of dairy products," Johnson said. "And there is no economic signal to a farmer to produce less when we have too much."

Johnson said government officials don't want to look at supply management options for dairy or other commodities with high stocks. NFU has championed different supply management programs in the past.

"There has got to be some sort of a government incentive for dairy producers to produce less milk," Johnson said. "Nobody wants to call it supply management, but that's what it is."

On the grains side, Johnson said, a modest increase in Price Loss Coverage rates would go a long way to helping grain producers at the moment. Johnson pointed to the higher commodity stocks, partially due to trade disruption. "Markets that we used to have are now gone and they aren't going to come back," he said.

ECONOMISTS: FINANCIAL STRESS NOT HISTORIC

Chris Burns, an economist for USDA's Economic Research Service, summarized his conclusion during the forum that "Financial stress is rising, but it is not high by historical standards." The farm sector is seeing increased debt, which totaled $422 billion in 2018. A softening in land values could lead to further stress in the farm sector.

The debt-to-asset ratio is still low at 13.5%. Larger farms, which are responsible for 50% of farm production, have higher debt-to-asset ratios that are closer to 20%. Yet those large farms are more profitable and more likely to repay loans on time.

The rate of nonperforming loans also shows that just a small percentage of farmers are letting loans slip more than 90 days past due. The rate in late 2018 was just 1.66%, only slightly higher than in 2012 and 2013, which the op-ed economists cited as "boom time" years. That compares with the mid-1980s when loan delinquency rates hit 7%, as they did in early 1987.

More than 98% of working capital and real-estate loans are performing well, the economists wrote, compared to 90% for the rest of the U.S. economy. "There is no evidence of a major farm crisis and no reason, on that basis, for legislators to give farmers even more subsidies," they wrote.

However, Glauber and Smith acknowledged that "This is not to say everything is rosy for U.S. farmers. Farmers today are, on average, moderately less affluent than in 2012 and 2013."

Further, they wrote that current U.S. trade disputes with China, India and other countries have affected farmer income and prices. "So for some farmers and ranchers, the lower crop and livestock prices generated by those trade disputes might lead them toward failure."

Johnson added that policymakers cannot be fixated on bankruptcy data because there are more ways to quit farming before it reaches the point of going to bankruptcy court.

"The risk we face by listening to folks who just look at the numbers is we're going to lose another generation of farmers," Johnson said. "That's not a good thing to lose."

Chris Clayton can be reached at Chris.Clayton@dtn.com

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(AG/BAS)

Chris Clayton