FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
December 10, 2019

IN THIS ISSUE:

1. Why the Number of US Small Farmers is Plunging

2. Small Farmers Facing a “Perfect Storm” of Problems

3. Rising Land Values Keep Many Farmers Afloat... But

4. Conclusions: No Easy Solutions For the Farm Crisis

Overview

In most Americans’ minds, the family farm still exists as it does on holiday greeting cards – as a picturesque, modestly prosperous expanse that has always filled the space between the nation’s urban centers where most of us live.

What most people don’t know is that the farming industry has been in decline for generations, and the closing days of 2019 find small and medium-sized farms pummeled from every side – from a trade war, repeated severe weather, tanking commodity prices, political polarization and of course the encroachment of large corporate farming defined by advanced technology and the efficiencies of scale. This is the worst farm crisis in decades.

Chapter 12 farm bankruptcies were up 12% in the Midwest over the year ended in June 2019, and they’re up 50% in the Northwest. Tens of thousands have simply stopped farming, knowing that reorganization through bankruptcy won’t save them. The nation lost more than 100,000 farms between 2011 and 2018, and 12,000 of those between 2017 and 2018 alone.

Having begun my career as a commodities broker specializing in agricultural hedging, and having presented hundreds of seminars on hedging to ag related companies in those early years, I have always had a soft spot in my heart for America’s farmers. That’s why I want my clients and readers to know the dilemma these salt-of-the-earth Americans are facing today. It should concern us all.

Why the Number of US Small Farmers is Plunging

Most small and medium-sized farmers in the US are up to their eyeballs in debt. Farm debt, at more than $427 billion, is on track to reach an all-time high according to the USDA. The average farm in America was $1.4 million in debt at the end of last year, and that figure continues to rise.

Unfortunately, over half of that debt ($250+ billion) is secured by the farmland itself, meaning farmers will lose their land if they can’t service their debt, as is increasingly happening.

In 2018 the ratio between loan volume and net farm income reached a 16-year high – not good! At the same time, rates of delinquency on farm loans surpassed those on all loans by commercial banks, according to the Federal Reserve Bank of Kansas City.    

More than half of all farmers have lost money every year since 2013, which explains why farm loan delinquencies are soaring. Agriculture Secretary Sonny Perdue said earlier this year that farmers have faced declining prices and incomes for years, leaving them more vulnerable to production disruptions caused by severe weather or market changes beyond their control.

Net farm income has dropped by nearly half since the peak in 2013, according to Perdue. The ongoing trade war and increased competition from overseas aren’t helping US farmers, either.
Farmers have always talked of looming disaster, but the duration and severity of the current crisis suggests an alarming and once unthinkable possibility – that independent farming is no longer a viable livelihood.

Small farms, defined as those bringing in less than $350,000 a year before expenses, accounted for just a quarter of food production in 2017, down from nearly half in 1991. In the dairy industry, small farms accounted for just 10% of production. The disappearance of the small farm would further hasten the decline of rural America, which has been struggling to maintain an economic base for decades.

“Farm and ranch families are facing a great extinction. If we lose that rural lifestyle, we have really lost a big part of what made this country great,” says Al Davis, a Nebraska cattle producer and former state senator.

Small Farmers Facing a “Perfect Storm” of Problems

A perfect storm of factors has led to the recent crisis in the farm industry. After boom years in the beginning of this century, prices for commodities like corn, soybeans, milk and meat started falling in 2013 and remain very depressed today. Two reasons for these lowered prices are the twin forces of technology and globalization.

Technology has made farms more efficient than ever before, but economies of scale meant that most of the benefits accrued to corporate farmers, who built up huge holdings as smaller farmers gave up and sold out.

Even as four million farms disappeared in the United States between 1948 and 2015, total farm output more than doubled. Globalization brought more farmers into the international market for crops, flooding the market with soybeans, corn, cattle, milk and other ag commodities. Yet with increased supply comes lower prices.

Global food production has increased 30% over the last decade, according to the American Farm Bureau. While that’s a great thing for feeding the planet, it also reduces what comes back to producers, whose costs don’t fall with prices.

President Trump’s trade war hasn’t helped matters. After the United States slapped tariffs on Chinese goods including steel and aluminum last year, China retaliated with 25% tariffs on agricultural imports from the US.

Making matters worse, China then turned to other countries such as Brazil to replace American soybeans and corn. China is a huge market for US ag commodities, a relationship that took years to develop. Now US crops are sitting in silos and grain elevators where farmers not only don’t get any money for them but also have to pay for storage in many cases.

Overall US agricultural exports between January and August this year were down 5%, or $5.6 billion dollars, from the same period last year. In 2018, the US exported about 25 million metric tons of soybeans to China between January and September, but only shipped 14 million tons during the same period in 2019, a 44% drop.

The Trump administration has already made $16 billion in aid available to farmers affected by the trade war with more to come, though small farmers complain the bulk of the money has gone to huge producers with large crop losses.

Around 40% of the $88 billion in farm income expected this year is going to come in the form of federal aid and insurance, according to the American Farm Bureau Federation. Farm income absent that assistance, at $55 billion, is down 14% since last year and is half of what it was in 2013.

Meanwhile, most small American farmers are routinely selling their crops for less than it costs to produce them. Prices are so low that many farmers are forced to figure out other ways to come up with the money to keep their farm going. Soybean prices have plunged almost 50% since their highs back in 2011-2012, yet cost of production increases nearly every year.

Rising Land Values Keep Many Farmers Afloat… But

While American farmers have been selling their crops and livestock at prices that are near or below the cost of production for the last several years, farm and ranch land prices have appreciated significantly for decades, thus boosting their net worth and allowing them to borrow more.

As you can see below, farmland prices in the Corn Belt increased from 10% to as high as 20% annually in the decade from 2004 to 2013. But as you can also see, from 2014 to 2018, land prices in the Corn Belt began to depreciate.

This is another significant factor in the increasing loss of small and medium-sized farmers. With land prices falling, many can no longer borrow to keep their operations going. Low commodity prices are turning many would-be land purchasers away.

Since starting its trade war with China, the Trump administration has been somewhat sensitive to the damage it has done to the farming industry. President Trump has authorized a total of $28 billion in federal aid to farmers, although many small farmers say they’ve received none of it. I was not able to confirm how much of that money has been awarded or who it went to.

Conclusions: No Easy Solutions For the Farm Crisis

There is much more I could write about the current crisis facing most of America’s small and medium-sized farmers and ranchers, but I think you get the picture. Farm debt is out of control. Due to technology and globalization, food production has increased 30% in the last decade, and most agricultural commodity stockpiles are in oversupply.

As has always been the case with commodities, increased supply almost always leads to lower prices unless there is a commensurate increase in demand. The reality is that most people around the world don’t significantly increase the amount of food they consume just because commodity prices are low. That is one reason we’re seeing the decrease in the number of small and medium-sized farmers in America.

Unfortunately, there are no easy solutions for this one.

Best regards,

Gary D. Halbert

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