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Will the ag 'boom' bust soon?

Jeff Caldwell Updated: 02/15/2012 @ 8:11am Agricultural content creator and marketer.

Farming's a business of booms and busts. Each period of prosperity is followed by a downturn, some sharper than others.

The last few years has been pretty good for a lot of U.S. farmers -- crop prices are solid, grain demand is strong, interest rates are low and overall farm incomes are healthy. But, what goes up must come down, right? If the last century or so of history holds true, that would mean the current "golden era" will inevitably fade.

Will that happen this time around? There are a few reasons to believe the "bust" may not accompany the boom underway, at least not immediately, says Federal Reserve Bank of Kansas City Omaha Branch Executive vice president Jason Henderson.

"In many respects, today’s farm boom is quite similar to past eras of farm prosperity. Global demand for agricultural products is strong. Agricultural supplies are tight. Low

interest rates are supporting the capitalization of rising incomes into farmland values," Henderson says. "Still, farmers have yet to use debt to pay for investments in land, equipment, and machinery on the scale of past farm booms."

Strong demand

There's been a lot of volatility in farm profits in the last decade; Henderson says in 4 of the last 10 years, net farm income has jumped by more than 25% and in 3 others, income's been 20% lower in the Fed's Kansas City district. Despite that, farm profits have surged based largely on crop and livestock demand, especially from exports.

"Spurred by rising incomes in developing countries, such as China, U.S. agricultural exports could reach a record high in 2011, topping $130 billion, double 2005 levels. Heading into the fourth quarter of 2011, crop and livestock exports jumped more than 35% and 25% above previous year levels, respectively," Henderson says. "Projections of additional gains in both population and income in developing nations underpin bullish expectations for agricultural commodities into the future."

As a farm profit driver, look for this factor to continue as both population growth and grain stocks tightening continues.

"Combined with robust demand, world grain supplies have fallen to historical lows with U.S. corn supplies at less than 10% of its annual use. In the livestock sector, global meat production has struggled to keep up with world demand, and prices for cattle, hogs, and milk have soared to record highs," Henderson says. "For U.S. producers, the prices received from crop and livestock products have risen more than 35% and 17%, respectively, over the past year."

Interest rates and land values

Coupled with this strong grain demand, low interest rates are translating directly to high farm land values. That alone would normally be a reason to fear the bursting of the farm profit bubble. But, one thing that's different during this boom cycle is the amount of debt accumulated to make the increasingly expensive capital purchases on the farm, Henderson says.

"Despite the similarities in broader market and financial conditions, farm capital investments are a striking difference between current and past farm booms. In contrast to past farm booms, non-real-estate investments in agriculture have not soared to the highs of previous farm booms. In addition, farmers have not used debt to fuel their capital investments," Henderson says. "Unlike the 1970s, farmers today

have been more restrained in their capital investments. To be sure, capital expenditures have risen sharply, but they have increased at roughly the same rate as farm profits. The ratios of farm capital expenditures to net income remained stable over the past 2 years, as it has, over the past decade."

This, to Agriculture.com Farm Business Talk veteran contributor kraft-t, is the biggest difference between past boom-bust cycles and today, and will continue to be if farmers take today's profit levels in perspective.

"Those with a lot of debt can service it at present rates. The last time we had onerous interest rates and declining asset values," he says. "Operating capital declined for many operations which diminished asset values as more land and equipment came to the auction block.

"I suspect the high prices for land and rent will be self destructive for some farmers and it could happen sooner rather than later."

More debt ahead?

If the boom's going to turn bust in the near future, it will be debt that does it. So little debt and strong farm profits right now could add up to an increase in debt load in the future as more farmers start to capitalize further on their strong financial footing.

"A lingering concern, however, is whether farmers will limit their capital expenditures and debt in future years. Agricultural advocates often tout that rising populations and a burgeoning middle class in developing nations will drive additional demand and profits for agriculture into the indefinite future," Henderson says. "These expectations combined with historically low interest rates could ultimately entice farmers to expand their capital investments to seize emerging opportunities."

Generally, though he's not counting out a slowdown in the ag economy in the next year or 2, Henderson says the current debt situation will likely keep the current "golden era" intact longer than those preceding it.

"Many farmers have not used excessively high levels of debt to finance capital investments. History has shown that golden eras fade and that farm corrections devolve into farm busts in highly leveraged environments."While current conditions appear to be following the rhythms of the past, there is at least one distinct difference—capital investments," he says. "With rising incomes and low interest rates, farmers are making significant capital expenditures on equipment, machinery, structures and land improvements."

Adds kraft-t: "Hopefully most operations are not over-borrowed, as banks and borrowers should have learned from the last go-round."


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Who's undermining the boom? 02/17/2012 @ 9:16am I noted one of those commenting in the Article was Kansas City Federal Reserve's Jason Henderson. A recent article in this publication had pointed to the fact that on an average, last year American Farmers retired about 40% of their debt. Also, they didn't in many cases borrow operating capital, not at 9%-nor even at 5%. Since I do Marketing in an annual niche publication that serves Rural America, I had already noticed Banks and Lenders from these same ares were pulling advertising with an ubiquitous, "The economy is too slow..." If you can't loan money for operations or equipment purchases, what is a banker to do? At the same time, land sales and rental prices started climbing through the roof. Expect a visit from the assessor's office pretty soon. County Boards have been schrieing about the budget crunch this year, as well. All of this seems to be orbiting the as yet unfinished Farm Bill. Pundits want it done before election. A couple of points seems to stand out. One, their seems to be a consensus to slash USDA Services and the Rural Development Funding Initiative. It might be good to note, that the Banks and Lenders mentioned above really don't like this initiative. Why? It's an anathema to their originators and boards. You can't get paid "Discount Points". Rates are fixed only. The criteria is "Set in Stone", as are the limits on the fees charged. In fact the rules are so precise, the banks can't do the horse trading and finagling they love to do with Fannie, Freddie and Sub-prime. (And yes, Sub-Prime is alive and well in Rural America.) Next, we have a brouhaha over subsidies. There are "Righteous Arguments" on both sides of the question, but let's look at something else, instead. Chine, Russia, Australia, Argentina, Brazil, and the EU ALL want the US Government to end subsidies-to "level the playing field". While Chinese Vice President Xi was in Iowa penning a $4 Billion order for soy beans, he was also denouncing subsidies as an unfair practice. Consider...if all these separate entities hate subsidies SO MUCH, perhaps THAT'S reason enough to leave them alone. If the USDA is contributing so much to the revitalizing of Rural America, (My town of Belmond just got $22.9 Million to expand our Medical Facilities and other folks used the Rural Development Funding for houses.) then why is it even on the table. I'd be more than happy to see the FDA, EPA, ATF, DEA, and IRS, bloated herds of toadies in each case, served up on the chopping block in it's stead. These folks are the forces gnawing away at the "Fat Years" the American Farmers are experiencing. Reigning them in might extend not only those years, but their effects on the rest of the American Economy. The "Lean Years" will come...let's not hurry them.

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