Alan Guebert is an Illinois farm journalist.
Even the most optimistic U.S. farmer is beginning to feel his guts knot as both old and new crop prices stagger ever lower while cattle prices drift below break-even and hog prices play tag with $40.
Ag financial types, however, are a bit more confident. They note with a bit of smugness that the past three-year run of strong farm prices, low interest rates and inflating land values has left farmers in the strongest equity position in decades.
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And, according to U.S. Department of Agriculture data, they’re right: For the first time in history, total American farm assets topped $1 trillion (U.S.) in 1996.
USDA estimates these values climbed to $1.08 trillion in 1997 and will balloon to $1.13 trillion in 1998.
Even better, as assets were growing by $50 to $80 billion per year from 1996 to 1998, farm debt was moving upwards by a relatively sleepy $5 to $7 billion per year – from $156.2 billion in 1996 to an estimated $167.6 billion this year.
The booming asset values and slow-growing debt totals means the national ag debt-to-asset ratio has actually improved from 15.6-to-84.5 in 1996 to a forecast 15-to-85 in 1998. Since every $1 of farm debt is backstopped by more than $6.75 of assets, little wonder farm loan officers can be heard whistling “don’t worry, be happy” despite current collapsing farm prices – they’re covered.
Covered or not, there’s a storm brewing, says Roy Ferguson, and ag lenders who take comfort in the current strong debt-to-asset shelter are whistling in the wind. When Ferguson, who describes himself as a micro-financial analyst, digs deeper into USDA numbers he finds “several vital elements obscured by USDA’s almost single-minded focus on total assets and net worth.”
One of those vital elements is farmers’ sales-growth-to-expense-growth ratio. Lately, this comparative ratio has become a screaming siren, he explains.
“Using USDA’s own data, the sales-growth-to-expense-growth ratio for U.S. agriculture was 1:1.19 from 1993 to 1997,” he notes. “That means expense growth accelerated 19 percent faster than sales growth during the period.”
Worse yet, continues Ferguson, USDA numbers clearly show the ratio will go negative as farm prices plunge this year: “The cumulative ratio for 1996 to 1998 is a negative (1.17):1;which means total sales will drop by $1.17 for every $1 that total expense mounts.
“And if you calculate the ratio for just 1997 and 1998, the ratio collapses to a (3.14):(1). That means farm sales will actually drop $3.14 for every dollar farmers cut expenses as a way to deal with falling farm prices.”
The dark picture Ferguson paints gets even blacker when he applies another financial ratio: “For every dollar of new debt added from 1993 to 1997, U.S. farmers added $1.04 of sales.
“Borderline, at best. When you do the ratio for 1996 to 1998, though, it goes negative and shows that for every dollar of new debt farmers added in that period, they generated a negative 36.8 cents in new sales. For just 1997 and 1998, the ratio is a horrible minus 81.5 cents. You can’t stay in business very long if a dollar of new debt returns a negative 82 cents.”
Ferguson confirms his calculations by pointing to USDA’s own bleak numbers. From 1993 to 1997, USDA figures farmers’ net cash income dropped by 19 cents for every dollar of debt added.
Bad as that is, it’s worse for 1996 to 1998: a negative 69.3 cents.
How can farmers survive such terrible financial performances?
“They can’t,” says the blunt Ferguson, “and many won’t. While the ag econ types focus on a lovely debt-to-assets ratio, farmers have been burning the candle at both ends. They are accumulating debt even as their total sales – because of falling prices – are dropping.
“From a national perspective,” he adds, “the picture is downright scary.”
