This winter was filled with engagements with farmers, lenders, agribusiness owners and stakeholders across America’s agricultural industry. One of the top questions from audiences was: Are we headed for a repeat of the 1980s farm crisis? Is this a case of “rinse and repeat,” or déjà vu, from more than four decades ago?
Ground zero
The epicenter of financial stress is the Mississippi River Basin and the southern region of the United States. There has been a documented increase in bankruptcies concentrated along the river. Cotton, rice, soybeans and other export-oriented commodities are bearing the brunt of competition from the global south, inflated input costs and consecutive years of weather challenges that have compounded these pressures.
Moving north to the Midwest, some farmers have “yielded their way” to breakeven or slightly positive margins. Others across the nation, particularly those with three to six diversified revenue streams, remain profitable and are insulated from 1980s-style conditions.
Financial perspective
The key variable that differentiates today from the 1980s farm crisis lies in the bottom half of the balance sheet, namely long-term items such as land values. In most regions, land values have not collapsed. Strong demand from baby boomer producers and institutional investors, relative to limited supply, has created a “floor,” or resistance level, that has limited value declines.
Risk management programs, along with crop and livestock insurance, have also increased resilience and provided a measure of stability in what is otherwise a chaotic economic environment.
Cash-flow reality
From a cash flow and profitability standpoint, inflated costs along with suppressed prices on many specialized grain and row crop operations mirror conditions of the 1980s farm crisis. The difference now is that stable-to-increasing land values provide the option to use equity to refinance operating losses and lines of credit over a number of years. However, this can result in a higher cost of production over the long run, potentially eroding competitiveness.
A new generation faces its first test
Layer on the fact that some newer farmers are experiencing their first true downturn during this renewal cycle. Interest rates on credit lines and loans are being reset after the low-rate environment of the COVID-19 era, and the combination of higher debt-servicing costs and the need for workable financial plans can, at times, feel overwhelming.
The most at-risk farms
Finally, the most at-risk segment includes farmers who rent or lease a large share of their productive assets. In these situations, the fallback option of refinancing using land equity is limited. These operations must excel in business management, financial discipline, marketing and risk management. They must also adapt quickly to changing price and input environments while maintaining modest family living expenses and a disciplined management mindset.
As the risk profile of agriculture evolves due to weather, trade sanctions and war, the potential exists that a global recession could be in store. So, stay tuned!