MWA: Murray Wise Associates

Current Credit Conditions Give Mixed Signals

This summer Iowa State University came out with its annual survey of Iowa farmland owners and reported that 82 percent of farmland in the state is debt-free. That was the highest percentage of debt-free land in the report’s history.

In contrast, the Federal Reserve Bank of Chicago in its most recent AgLetter reported that the fund availability index for agricultural banks is at 82, its lowest point since the third quarter of 2000. It should be noted that the only other times that the fund availability index has been lower at ag banks were in the second quarter of 2002 and from the third quarter of 1977 to the first quarter of 1980. Meanwhile, the loan-to-deposit ratio at ag banks in the district has continued to rise to an all-time high of 79.4 percent.

The amount of land owned debt-free and the credit conditions outlined in the AgLetter may seem to disagree with each other. However, what has happened is that more individuals have paid off their farms and own them debt-free, while others have continued to increase the amount of debt they have. This has created a scenario in which there is more debt than ever before, but in fewer hands.

Until recently, high commodity prices, strong land values and low interest rates have covered up many of the issues being this leveraged can cause. However, commodities have been hit hard by tariffs and by macro supply/demand factors that have driven prices down. At the same time, land values have stagnated, and interest rates are on the rise.

While cash rents and land prices have both slightly declined, they still remain well above the levels of a decade ago while input costs aren’t much different (in some cases higher) than they were when corn was $7 a bushel.

While current farm conditions are less than ideal, we are confident it will not be a repeat of the 1980s farm crisis. For one thing, far more land is held debt-free, as evidenced in Iowa farmland data showing 82% of acres owned debt-free today versus the 62% in 1982. The planning of farmers and farmland owners across America for a down market is apparent today, and these are the owners and farmers who will continue to own and farm for the long haul.

This is not to say that debt does not have its place in farmland ownership or operations; rather, that farm owners must look at their operation or investment as a business and make sure they can truly afford their current and anticipated debt load and are not simply farming on equity.

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