2019 marks the sixth consecutive year of U.S. net farm income being down more than 50 percent below the peak resulting from the ethanol boom and Chinese soybean purchases in 2013. So why aren’t more Mid-South farmers going out of business?
The answer is testimony to the staying power of growers in the face of adversity and to the foresight of the authors of the 2014 farm bill, according to Greg Cole, president and CEO of the Little Rock, Ark.-based AgHeritage Farm Credit Services.
“When I spoke at this conference in 2014, net farm income had fallen 50 percent in that one year,” Cole told participants in the Mid-South Agricultural and Environmental Law Conference in Memphis, Tenn. “I made a bold prediction that if this environment lasted for an extended period of time we could lose the bottom 25 percent of our farmers. That hasn’t happened.”
Cole, whose organization provides nearly $1.4 billion in operating loans to Arkansas farmers annually, listed several reasons he believes producers have survived the steep decline in prices and other adversity.
“First of all, we started this cycle with a very, very strong balance sheet and a lot of liquidity,” he said. “I’ve been loaning money in the Arkansas Delta for 34 years. In 2012, farmers across this river here made more money than in any other time in my career.
“The other thing is we started a new farm bill (the Agricultural Act of 2014), and, guess what, it’s actually working, especially here in the Mid-South. The farm bill safety net has turned out to be a lot surer than originally thought, and that’s been a big factor.”
Land values, meanwhile, have remained relatively high and that’s been helpful for farmers needing to refinance and for lenders to use as collateral. Interest rates have also remained low, especially compared to what farmers faced in the 1980s.
“And the reality is that when you have a rapid decline in income like that, something has to be done,” he noted. “Our farmers have made some half-time adjustments and have done some things to increase their efficiency to minimize losses and generate profits.
“The good news is we still have most of our farmers still on the farm,” he noted. “The other side of it is there still is a lot of time left in this game, and there is some negative current coming down this Mississippi River.”
He displayed a slide showing projections of net farm income from the Food and Agricultural Policy Research Institute and USDA. “These are suggesting nothing is really going to change in the near-term unless there is a game-changing event. We all know that forecasts aren’t always accurate, but this suggests we could be in this kind of environment for some time.”
Cole said one of the biggest negatives facing farmers can be summed up in two words — too much. “We have too much commodity in certain crops; we have too much water and way too much moisture; we’re way too late on our planting — the latest since they’ve kept records; we have way too much arguing going on with our trading partners — at first with China and now we have Mexico in the mix; and our farmers are having to rely way too much on politicians to restore our profitability in the form of the Market Facilitation Program payments we got last fall and that are in play now.”
The trend on working capital hasn’t been good, said Cole. Working capital is not a phrase that easily rolls off most farmers’ tongues. They are more accustomed to talking about profits (or losses), but working capital (current assets minus current liabilities) is an important measure of a grower’s ability to withstand economic stress.
More than $100 billion lost
“We lost more than $100 billion of working capital in farmers’ balance sheets,” said Cole, referring to a slide showing the rise and fall of working capital and net farm income between 2009 and 2019. (Working capital peaked at $165.1 billion in 2012 and declined to $56 billion in 2018.)
“That is a very rapid change in that measurement in retrospect,” he noted. “And this is on top of a lot of farmers refinancing or replenishing their working capital in the years between that ‘super-cycle’ and now.” (Working capital is forecast to decline again in 2019.)
Cole used an example of two air tanks to represent a farmer’s balance sheet. In the top tank is the farmer’s current assets, current liabilities and working capital or liquidity. In the bottom tank is the farmer’s farm equipment and farm real estate.
“When you have operating losses, it comes out of liquidity, so the top air tank declines,” he said. “There’s been a lot of refinancing, so air from the bottom tank has been shifted to the top. That’s one reason people are still farming — they still had air in the tank, and they shifted it up. In a lot of cases, those air tanks are running short.
“One of the things that can exacerbate this is if farm real estate values begin to decline, that bottom air tank is going to be sucking air. Most farmers are still in business, but some farmers are close to their last breath, and that’s in the bottom 25 percent.”
Cole expressed some surprise at the forbearance of lenders in the face of such adversity.
Lenders stayed with borrowers
“Lenders have stayed with borrowers a lot longer than I thought,” he said, referring to the precipitous drop in farm incomes since 2013. “I go back to the 1980s. I showed a slide earlier that indicated the two worst years for net farm income in the last 100 years were 1933 and 1984. I started my career in 1984. I was there for D-Day.”
So how are farmers doing today? He displayed a slide containing a series of quotes attributed to Dr. Danny Klinefelter, professor of agricultural economics at Texas A&M University, that Cole said best sums up the current situation.
“The function of a competitive market is to drive the economic return to the average producer to breakeven through supply and demand in both input and output markets,” he quoted Klinefelter as saying. “It’s like in a super-cycle — if everyone is making money that doesn’t last very long; if everyone is losing money that doesn’t last very long. It goes to equilibrium. I believe we’re bouncing around equilibrium now.
“In equilibrium, the top end of farmers are profitable and growing; the average are hanging in there; and the bottom end are losing money and exiting the industry,” he noted. “That’s really a depiction of where we are. The difference is that because of a strong farm safety net and all those factors I listed, the bottom third is still hanging in there. But the air in the tank is getting real low.”
In the final part of the quote, Klinefelter says: “Business success and survival depend on continuous improvement at a pace to stay in the front half of the pack.”
“The ones that are going to make it possess that,” Cole said. “That’s a good depiction of where we’ve been and where we’re going in the ag economy.”
For more information on the conference visit www.NationalAgLawCenter.org.