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Trouble on American Farms: 'We Face a Grim Future'

Farmer Bill Maupin verifies that his equipment is dropping seeds at the appropriate depth as he plants a cornfield outside Henry, Ill.
Daniel Acker | Bloomberg | Getty Images
Farmer Bill Maupin verifies that his equipment is dropping seeds at the appropriate depth as he plants a cornfield outside Henry, Ill.

Jim Schriver has been farming since he graduated from Ohio State University in 1963. The 72-year-old grandfather of two grows corn, soybeans and livestock on his 1,600-acre farm in north central Indiana.

Like most farmers, Schriver has dealt with drought, freezing temperatures and the uncertainty that comes with toiling in the fields.

But Schriver says he's worried about a new threat to his livelihood—the real possibility that the U.S. agriculture industry could suffer a crippling economic bust after years of unprecedented boom.

"I think we have to be worried about this in a big way," said Schriver. "We face lower incomes, inflated land values and rising costs to farming. We have plenty of reasons to be worried."

"This could be very painful for farmers," said Blake Hurst, who grows corn and soybeans on a 450-acre farm in Tarkio, Mo.

"I do expect things to get worse," said Hurst, 56. "We face a grim future."

What's setting off alarms is a possible downward spiral in farm land values—coupled with an expected decrease in income—that could raise farm debt to unsustainable levels.

A report released last month by the Federal Reserve Bank of Kansas City warns that if farmers use their accumulated wealth instead of profits to finance their agricultural investments, they could end up in greater debt, risk bankruptcies and potentially face the loss of their farms.

There's precedent for such a boom-to-bust cycle based on rising debt. Farmers suffered downturns in the 1920s and 1980s following economic booms in the 1910s and 1970s. In both cases, rising debt left many bankrupt.

(Read More: Fears Over Economic Boom to Bust for Farmers)

"I remember the 80s, and it was a bad time," said Schriver. "Land values went south, and a lot of farmers were in debt. There were a lot of bankruptcies from overdue loans that couldn't be paid."

The value of their land is an economic linchpin for farmers. Farmland accounts for 85 percent of the typical farmer's assets and serves as collateral for many loans. If land prices fall, so could the value of farms themselves. Investments in farmland have had three years of double-digit growth, according to the Federal Reserve study, as farmers keep putting money into land instead of other investments, such as stocks.

"Land values can't stay as high as they are now," said Hurst, who's written on the subject. "They've increased at a double-digit rate for the last seven years in the Corn Belt. But those values can crash in a hurry, increasing debt levels. Just look at former home owners in Las Vegas and Southern California."

"We can see debt already increasing," Hurst said. "A Kansas Farm Management Association report says that the number of farmers with a 40 percent debt ratio is higher now than it was in 1979," and that there are three times as many farms with a debt ratio of more than 70 percent, he added.

A rise in interest rates also could make farm debt worse, said Roger Hadley, a 60-year-old farmer.

"I think there's a false sense of normalcy with farmers about this right now," said Hadley, who grows soybeans and corn on 700 acres near Fort Wayne, Ind.

(Read More: Bad News at the Grill as Beef Prices Hit All-Time High)

"Rates have been low for a while, but if they do go up, that's only going to increase the debt burden on farmers," Hadley said. "Loans would get more expensive."

What happens to interest rates and land values may be a guessing game at this point. But it does seem fairly certain that farm incomes are headed down. The Department of Agriculture predicts a 25 percent decline in farm profits next year as commodity prices level off and exports are reduced.

This comes after incomes reached $98.1 billion last year—topping an overall increase of 147 percent since 1988, according to the USDA.

"We're having a lot of commodity surplus here because the world is growing its own food," Schriver said. "And prices are going to go down as a result."

Lower farm income only adds to the pain of increasing costs.

"Not too long ago it took $400 to grow an acre of corn," Schriver said. "Now it's $1,000. A bag of seed was around $35 to $40 an acre. Now it's $245 or more. It's getting very expensive to farm."

'Banks Are Being More Cautious'—and That's a Good Thing

Like Schriver, Hurst and Hadley, Lin Warfel grows soy beans and corn. He has an 800-acre farm in central Illinois, about 140 miles south of Chicago. But unlike his fellow farmers, the 72-year-old feels a bit more more sanguine about predictions of a bust.

"I, too, saw the 1980s, and it was bad, but I don't think we'll have the same situation even if land values fall," Warfel said. "Banks are being more cautious and demanding more cash up front on down payments for loans. You used to see farmers borrow 100 percent of a loan. Now you don't."

Farmers and banks may be more careful about loans, but there might not be much financial help in the case of a bust. Congress is debating a five-year agriculture bill with big limitations in an era of decreased federal spending.

The Senate version calls for roughly $2.4 billion a year in cuts, while a House version would save $4 billion out of almost $100 billion annually. Those cuts include more than $600 million in yearly savings from cuts that took effect earlier this year.

"There really aren't the resources from Washington like there were in the past," Hurst said. "They spent billions in the 198's on supporting farm income, but I don't see that happening again.

"And as for crop insurance, it's very important to farmers. However, it is tied to a five-year average of market prices, so the insurance guarantee will trend down as prices go down," Hurst added.

While still a cautionary tale to this point, the seeds for an economic bust in agriculture may have been planted.

"I know of a farmer in another state with a large farm who just went bust because of debt," said Schriver, who added that his land is completely debt-free. "It's likely to keep happening more often."

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Schriver added that he soon will retire and hand over the farm to his two 20-something grandsons. He echoed the concern from farmers and analysts alike that the next generation could get caught up in a downturn.

"They haven't seen the bust times like I did," Schriver said. "I caution them every time they want to buy something, 'Do you need this?' I asked that recently about a tractor they were going to buy—they bought it anyway."

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