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The Elbert Files: A cloudy farm forecast


It’s been a while since I looked closely at the farm economy.

That’s largely because farm finances today are so complicated with so many qualifiers that it is difficult for experts, let alone a nonfarmer, to accurately read all the signs.
With that caveat, let me say that what I see now is worrisome.

One major concern is that farm income is increasingly detached from real-world markets. It’s been that way for some time, but articles based on a recent study by the University of Missouri show the problem is getting worse.

One article was titled “Direct Farm Payments to Soar in 2020.” The other carried the headline “Huge federal payments will make up 36 percent of farm income this year.”
Neither situation is startling, but the articles raise concerns about the amount of money the federal government is pumping into the farm economy in the wake of the COVID-19 pandemic.

Questions include: What does the spending accomplish, and is there a plan to resolve current problems?

Right now, answers are hazy at best.

The University of Missouri study predicts direct payments to farmers tied to trade war and coronavirus relief programs this year will total $32.8 billion.
Adjusted for inflation, that’s roughly the amount of direct payments farmers received from the government in 1983 at the height of the farm crisis, according to David Widmar of Agricultural Economic Insights.

It’s worth noting that 1983 was basically a year without a crop. The government’s unique Payment-In-Kind program that year provided massive incentives for farmers not to plant. The no-crop strategy was designed to eliminate surpluses that had accumulated during President Jimmy Carter’s ill-advised 1980 Russian grain embargo.

Direct payments in 1983 amounted to 65% of farm income. This year a similar level of direct payments is expected, equal to roughly 36% of farm income, which is currently pegged at an estimated $90 billion, according to Chuck Abbott, who writes for Ag Insider.
So things clearly are not as bad this time.

However, one big unknown is what happens next year. 2021 is not an election year, and that will make it more difficult to apply political pressure to keep direct payments at their current high level.

If farm income falls significantly in 2021, it could cause serious problems because of the increased debt farms carry.

Farm debt is my second concern. It peaked at an inflation-adjusted $440 billion in the early 1980s before declining to a more sustainable $225 billion during much of the 1990s.
But farm debt has been climbing again for most of the past 20 years and now stands at about $425 billion, which is not far from the $440 billion that triggered the farm economy collapse during the 1980s.

Two big differences between the 1980s and now are inflation and interest rates. Both were much higher back then.

High inflation encouraged many farmers to borrow more than they normally would on the theory that loans could be repaid with cheaper, inflated dollars.

Inflation led many producers to borrow more than they needed and use the extra money to buy land. But it turned out to be a bad deal, because higher inflation also resulted in higher interest rates. Plus, land values were quickly bid up above what could be supported by crop prices.

At the time, many bankers, like farmers, did not understand what was happening. They encouraged land purchases, which ultimately wiped out many rural banks, along with many family farms.

Today’s lower inflation and interest rates provide a cushion that did not exist in the 1980s.

But direct payments are a part of the fabric, and if they decline significantly next year, it will weaken the cushion. 


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