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hardnox
Advisor

Financial stress among croppers

Way early but at this point it looks like farm finances in general will deteriorate further going into next year, and probably more concerning, 2017 projections are going to look rough.

 

FWIW, people I know in banking and accounting indicated this winter that we're probably two years away from any large scale problems.

 

It is now an interesting game with the rise of vendor finance. A primary lender is pretty well cushioned if he has the first lien and vendors hold a decent chunk in a subordinate position.

 

That doesn't mean the primary lender won't choose to grab 100% of his interest while he still can if he doesn't like what he sees..

 

I was totally wrong back in the 90s when I assumed that certain operations would be credit constrained- my take on it is that whether it is true about any particular operation it is true in general- vendor credit fueled a lot of expansions.

 

Now, as things tend to go,the tail of that dog is probably going to wag. That additional influx of credit is fully priced into the marketplace.

 

If these things come to pass, I think the aggregate stats may understate the degree of the pain. I don't expect land prices to crash- there is huge concentrated wealth out there and a 1.5%  yield doesn't bother those people at all if they have to find somewhere to park their money..If all else fails they can dig a moat around it and sail their yatchs around in circles.

 

The credit probelms in the 80s were land related, the next one will be about operating credit.*

 

As long as I'm rolling, there probably will be credit available for a few people to cobble together huge high tech operations run by autonomous equipment 24/7 etc.Which would keep rents up via the tens of bucks an acre of cost reduction, support land values, and effectively end farming as we've known it.

 

I won't stand in the way of progress but would prefer not to subsidize it. But alas, 0 buyers here on a conversation about more severely capping insurance and countercyclical subsidies. That boat already sailed, stealthily, with the 2014 Farm bill, but I guess maybe you can recall it to port?

 

My guess would be that the lenders, and particularly the vendors holding the bad paper (the people who really write the Farm Bill) would staunchly oppose that and favor a bailout for themselves.

 

Yuck. End-o-farming or just the inevitable destination of the neoliberal ag model.

 

* I've speculated here several times here in recent years about strategies to roll debt to long term. So far, despite all the Coming Hyperinflation talk, long rates continue to sag- now at multi-decade lows. So in that regard it was more profitable to keep term short. The question was always, but should I be getting ready for a time when short term credit is harder to come by, even if it costs me a little in the near term.

 

And then the question arises about what you can do with that cash to obtain a decent return . Whatever that might be if somebody does that they definitely need a first rate accounting system to make sure that the cash isn't slipping out the back door.

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4 Replies
Shaggy98
Senior Advisor

Re: Financial stress among croppers

I just heard on our local noon news that the average corn farmer with 1000 acres of corn has lost $175,000 in the past 3 weeks due to the falling prices.

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BA Deere
Honored Advisor

Re: Financial stress among croppers

I think it will be the "medium sized" farms that will be squeezed, those under the illusion that some of their living expenses should be generated from the farm.  The smaller ones have off-farm income, no debt and they can farm forever and a day.  The Big Whoppers are living in an alternative universe, their standards of livings haven`t suffered yet, new houses being built, property transfers into their names and such.  They either are enjoying the "bennefits of scale" or they have a printing press in their basement. 

 

But if a Big Whopper ever goes broke, with 20 or 30,000 acres, you don`t just walk away from that, the tax implications alone would be very complicated. And if they started dropping like dominos, I don`t know if there`d be enough medium sized farms that could pick up the slack...that is if they weren`t broke too.  If a 1700 acre farmer quits, that land is easily snapped up in one swoop by a really big Big Shot, and up go some new bins of course   🙂 

 

So, if the bears are ultimately right and we start out 2017 with $2.50 corn and $8.00 beans, and a drought doesnt bail us out in `17 that will be tough but interesting.   I guess interest rates will supposedly stay low though, but if it continues land prices and rents will have to eventually be affected.

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Shaggy98
Senior Advisor

Re: Financial stress among croppers

BA I agree with nearly all of your comments with the exception of small farms can farm forever and a day.  Yes I am a small farmer and yes my wife and I both hold off the farm employment but there are consequences of such.  Timing is one thing, if it is time to do a certain operation on the farm and we're both scheduled to work, we find ourselves hiring that certain operation thus driving up our COP.  As soon as our hired labor out weighs one of our off farm jobs we'll need to evaluate our operation at that time.

 

Having 0 debt load both on and off the farm is the key to maintaining an operation that is sustainable.  Diversification is a close second.

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Jim Meade / Iowa City
Senior Advisor

Re: Financial stress among croppers

"I just heard on our local noon news that the average corn farmer with 1000 acres of corn has lost $175,000 in the past 3 weeks due to the falling prices."

 

That's the trouble with the news these days.  It's filled with empty words by empty-headed talkers.  What a foolish statement.