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Veterans of the 1980s look at today’s farm debt

Today
they have the appearance of grizzled veterans, a little grayer than when they
started in 1989 to tackle a woeful hodgepodge of financial record keeping
methods that left lenders and farmers operating in the dark.

But as they spoke at a meeting in St. Louis, Wednesday, it became clear that
the original founders of the Farm Financial Standards Task Force really are
veterans of something like a war -- the farm debt crisis of the 1980s. Those
were the worst times in agriculture since the Great Depression. Families lost
farms held for generations. In a few cases, despair and depression led to the
deaths of farmers and lenders, as another speaker who survived that time
recounted later in the day.

The group, now called the Farm Financial Standards Council, invited four of the
early task force members to describe how they spent three years getting farm
lenders to agree on a set of "sweet sixteen" financial ratios. The
program called their session, "Everything Old Is New Again." The group's
members hope that's not the case and the panelists said that a lot of things
would have to happen for a repeat of the 1980s today.

The task force met in 1989 in St. Louis as a group of about 50 members of the
ag lending industry and academia. It quickly agreed on about 80% of what the
industry needed to do to match the accounting standards of other industries. It
took three years for a smaller group of volunteers to come up with the
remaining 20%.

Purdue University Ag Economist Freddie Barnard found himself in the role of
mediating between task force members to get final consensus.

"It was a rewarding experience. There was some times when it got a little
frustrating there," Barnard said Wednesday.

"In my mind the greatest accomplishment was to get the thing finished,"
said John Crowgey, a task force member who worked in the Farm Credit System at
the time.

At the end of that process, leaders of the American Bankers Association
threatened to pull their support of the project, said Stan Forbes, a Virginia
banker and ABA member who chaired the task force. At a meeting at a Washington,
DC restaurant, "the discussion got so loud that the maitre d' came over
and moved us into a private room."

In the end, ABA, Farm Credit and others did support the Sweet Sixteen and, according
to Steve Hofing, a management consultant with Centrec Consulting Group, today's
Farm Financial Standards Council has evolved into working with commodity groups
and farmers to improve on-farm accounting and financial analysis. Hofing was
another task force pioneer who led the discussion Wednesday.

When asked if something like the 1980s could happen again, the group seemed to
doubt that it's likely, but they still see risks ahead.

"Should farm income go below $50 billion or stay below $60 billion for two
or three years, we've got some problems," said task force member Danny
Klinefelter, an economist with Texas A&M University.

In 2009 net farm income in the U.S. fell below $57 billion, down from $87
billion the year before. For 2010, however, USDA is forecasting a rebound in
income to about $63 billion.

The panelists agreed that it would take more than just one thing to trigger
another 1980s-level farm debt crisis. Land prices would have to collapse.
Interest rates would have to shoot up.

Another speaker who followed the farm debt crisis veterans, Brian Newcomer of
Rabo AgriFinance in St. Louis, said that while farmland prices fell about 4%
across the nation last year, his bank is not expecting a similar drop this
year. And that’s nothing like the decline of more than 50% over several years
in the 1980s.

The specter of rising interest rates has worried many ag economists and farmers
but right now. But, Klinefelter said, as long as the U.S. has a slow,
Japanese-type of economic recovery, rates might not go up as much as people
have expected, he said.

A few other points gleaned from private conversations at the conference:

  • The hog industry may be starting to recover and it might have been much worse
    for that sector of farming if lenders had not shown some forbearance on debt in
    that industry. 
  • Lenders aren’t looking for new farm borrowers. Those who have a good
    accounting system and are using those ratios developed 20 years ago, and who
    have at least 25% working capital, will have the best chance of finding a new
    lender if their current lender exits agriculture.
  • One of the factors that helped trigger falling land prices in the 1980s was a
    huge carryover of corn, about 3.5 billion bushels, that depressed prices. At
    least one lender at this week’s conference confided that he’s worried about any
    troubles the ethanol industry might have. That industry now accounts for 4.5
    billion bushels of corn use, nearly as much as the corn sold for livestock
    feed.

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