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Will farmers get a new farm bill this year?

Ag lenders weigh in on farm policy, farm profitability and worries over high fixed costs.

Mike Wilson, Senior Executive Editor

April 6, 2023

6 Min Read
U.S. capitol building with cherry blossoms
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With so much focus now on planting season weather, it’s easy to forget some of the big policy and financial issues facing agriculture: namely the looming farm bill debate and high land costs driving cash rents and fixed costs.

To get insights on these topics and more, we turned to three Farm Credit leaders – Farm Credit Mid-America’s chief lending officer Tara Durbin and chief credit officer Vince Bailey, and Matt Erickson, ag economic and policy advisor at Farm Credit Services of America. Erickson formerly worked as Kansas Senator Pat Roberts’ chief economist.

Will there be a Farm Bill finished by September?

Erickson: Look at the dynamics of this congress. Looking at a pathway to completion, House Ag Committee chairman G.T. Thompson, R-PA, and U.S. Senate Ag Committee chairwoman Debbie Stabenow, D-MI, have done multiple farm bills, so I think there’s a desire to get one done. For some, the priority is crop insurance; on the Democrat side it’s nutritional assistance.

On the flip side, there are a lot of challenges. One is the overall budget. How are certain priorities going to get paid for? The committee is already starting off in the hole. There are 19 programs in the 2018 farm bill that don’t have a budget baseline after fiscal year 2023, and that costs $876 million. So if they want everything to be the same in the 2023 farm bill, they’re going to have to find that money somewhere, right in the middle of a budget debate. The debt ceiling debate is going to be even hotter this summer. That’s got to be addressed.

Right now lawmakers are in listening mode, saying the right things; both sides want to get it done. But the calendar is going to be extremely tight to get it done this year. I’m optimistic, but the clock is ticking.

What should the new Farm Bill try to accomplish in the next five years?

Erickson: In 2018, under Sen. Pat Roberts’ leadership, his focus was the future; you don’t write a farm bill for now; you write it for the farm economy in the next 5 years. And if you look at the baselines, we could see commodity prices becoming bearish with burdensome supplies. Not just Brazil’s large crop but also, say, 92 million U.S. corn acres at a 181-bu. per acre trendline yield. A large crop would be bearish.

When I look at seasonality trends, that June-August time is critical because Brazil’s safrinha (second crop corn) will hit the market at the same time as our U.S. weather market is happening.

Have recent profitable years changed how farmers borrow money?

Durbin: Balance sheets are strong. In some cases they’re using cash instead of drawing on their operating lines. It’s our biggest competitor. We’re seeing a little lower utilization of operating lines, but that’s part of the cycle we’re in. It’s temporary.

Bailey: They’re in really good financial shape right now. We’ve seen two really good profitable years, especially in grain. Yet, working capital is still less than what you think it should be, but that’s because they’re buying equipment, land, making improvements and using more cash.

When farmers are in a down economic cycle they tend to buy equipment and land but borrow at higher levels to pay for it. When producers do borrow for depreciable assets it is important to remember all principal payments are paid after tax income. Producers should be cautious with accelerated depreciation while borrowing on the asset. Tax management is important and ag is one of the few industries where you can move that income statement around.

Erickson: I come from a swine farm and margins are tight. It’s difficult when you are feeding a hog $6.50 corn. Argentina’s going through drought, feed prices are high. Fertilizer prices are coming down but some of these base cash rents are going up.

Despite healthy profits, what are headwinds farmers should be concerned with?

Bailey: One of the places you can get sloppy in is family living costs, and those can become fixed or permanent costs to the operation. Fixed costs, equipment, land, and improvements in general can expand during periods of strong returns. In strong periods like this you can make some financial mistakes that are hard to adjust as margins thin.

I also sense some frustration with land values now. Some farmers are not comfortable competing with land at these soaring prices. Eventually high land values equate to high cash rent because investors expect a return. Using a 3% cap rate plus real estate taxes on $15,000 per acre land equates to about $475 to $500 per acre cash rent. Coming out of the 2008-2013 time period we saw higher levels of financial stress in operations that leaned heavily on cash rent.

In situations like this it’s easy to get your farm’s fixed cost structure way too high. Variable costs can be adjusted. If you’re not managing that fixed cost structure, how ready are you for an economic downturn? Will your banker help walk you through it? For the farmers who are financially astute, it’s an easy conversation; for the ones who aren’t, it’s painful. But it’s not just up to lenders to understand your farm’s fixed cost structure.

Do farmers on the whole have good financial skills?

Bailey: There is a fairly wide range, but part of that is the lender’s fault. We need to help producers value the financial statements as much as we do. Financial statements don’t have to be complicated, but they do need to be accurate and completed on a consistent basis. One of the things we do in the Growing Forward program is focusing younger growers on financial acumen, to help ensure that we bring the next generation in for the long haul. We help them create business plans, help them understand and adjust balance sheets, and therefore make better decisions. We have producers coming back to the farm with a mindset for managing the operation.

Erickson: When I’m talking to producers, they have a lot of memories of 2012 and 2013. When you go back to the 2012 drought, corn went to $8 and profits were high, but things went south quickly after 2013. There’s a lot of people worried we’ll have a big crop and prices will go south. The last few years have been a supply-driven market, but it could quickly switch to demand-driven. Market demand is always key, but especially if we produce large crops. You have all these Black Swan events that make an economist shake his head. These folks get it.

Older operators remember interest rates in the teens in the ‘80s, and younger farmers have no experience with anything but historically low interest rates the last 15 years. Think about that.

About the Author(s)

Mike Wilson

Senior Executive Editor, Farm Progress

Mike Wilson is the senior executive editor for Farm Progress. He grew up on a grain and livestock farm in Ogle County, Ill., and earned a bachelor's degree in agricultural journalism from the University of Illinois. He was twice named Writer of the Year by the American Agricultural Editors’ Association and is a past president of the organization. He is also past president of the International Federation of Agricultural Journalists, a global association of communicators specializing in agriculture. He has covered agriculture in 35 countries.

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