1998 was not a good year for farmers. Prices for grain and livestock generally declined as the year wore on. Grains rallied slightly in early October but then slid again. Hogs hit 20-year lows in September and then sagged even further in closing weeks of the year. Problems in agriculture made headlines in regional and national media. One question often asked is "Are we back in a farm financial crisis like the early 1980s?"
Most agriculture economists and many farm lenders have responded "Not yet." There are several differences. Both farmers and bankers learned bitter lessons in the 1980s and have been more conservative in their borrowing and lending practices. Farmers, on average, are not as highly leveraged as they were in the early 1980s. The current macroeconomic environment is one of near price stability and low interest rates in contrast to the inflation psychology and double-digit interest rates that prevailed 18 years ago. Land prices have not been increasing at annual double-digit rates the way they were in the 1970s. And land prices have not been falling the way they did in the early 1980s, wiping tens of thousands of dollars off the asset side of farm balance sheets.
Keep an eye on land prices
One important difference between the 1980s and the current slump is that land prices had not been falling-until now, that is. Since 1987, bankers responding to the Minneapolis Fed's Quarterly Survey of Agricultural Credit Conditions have usually reported modest, but positive, changes in land values. Occasionally some bankers have said that land prices in their area were unchanged compared to a year earlier when weather or prices were particularly adverse locally. For example, as beef prices dropped in 1994 to 1996, some Montana bankers reported that grazing land prices had not increased. But no one reported decreases.
That ended in 1998 when a few bankers in the Red River Valley of northwestern Minnesota and eastern North Dakota began to report price declines for cropland. First two, then four, then five such reports came in. Then suddenly in the fourth quarter, 19 bankers said land prices were down in their areas. Another 47 said prices were flat, zero increase or decrease. An additional 36 did see some increase. Averaging across states, the increases outweighed the decreases in all states but Minnesota, where cropland had an average decline of 2.1 percent. In North Dakota, grazing land also dropped slightly, but the number of North Dakota bankers who report in this category is quite small for any inference to be made.
The Minneapolis Fed survey results were not isolated. The Kansas City Fed received a number of reports of land price declines in its most recent agricultural credit survey and Iowa State University found an average decline of 1.9 percent in the value of all farmland in the state for 1998 compared to 1997.
Cause for concern?
Are these reports something that should cause concern? The caveats about the existence of an ag crisis expressed above are still valid. While most farmers are suffering financially from low prices and while many farmers will experience operating losses in 1998, few are as bad off as many were in 1983-1985. The average level of debt relative to assets remains lower now than then.
Still, declining prices may indicate that farmers are less optimistic about the future than they were just a few quarters ago. The price of an asset depends on market expectations of the income to be generated by that asset over many years. A drop in land prices means a drop in the collective expected value of income from land.
Declining land prices also mean that there is some erosion on the asset side of farm balance sheets, decreasing their net worth and increasing their leverage even if other factors remain constant. So far the declines are relatively modest overall, and will not greatly affect the financial position of most farmers. But reported declines are still concentrated in regions that have had the most adverse combinations of price, weather and wheat scab. [See the November 1998 fedgazette for more on the impact of scab at minneapolisfed.org on the Web.] Farmers in those regions who were already highly leveraged may find that the more accentuated declines in those regions will make a significant hit on their financials. Additional voluntary or forced farm liquidations may put more land into sale or rental markets, further augmenting price declines if nothing else improves.
Once again, are we in a farm crisis? Many rural bankers respond something like the following. "We are not in a crisis yet, but we are about a year away from one." In other words, if currently depressed farm commodity prices do not improve during 1999, many more farmers will see their equity erode to a point where their ability to continue farming will be in serious jeopardy. That's a pretty level-headed assessment of the situation, one that is substantiated by the smallbut increasingly widespread reportsof farmland price declines.