Legal Narration 2
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turn around Topics. The coming U. S. Farm Crisis Written by Mark T. E. M. Martino and Daniel F. Dooley. Narrated by Joseph Forest. Stag Mayer. University of Iowa College of Law Class of 2019 A. B. I journal, May 2018. In the late 19 seventies and early 19 eighties, US agricultural sector was doing well but building toward a crisis that would become the most severe since the Great Depression. Thanks to record acreage planted, higher crop yields and a strong U. S. Dollar, which hurt export sales, commodity prices began declining in the early 19 eighties, paired with increasing interest rates, many farmers began experience in severe declines and earnings, leading to extensive foreclosures and bankruptcies that devastated the industry. Today, the agricultural sector is again struggling, and circumstances have begun to resemble those faced by farmers. In the early 19 eighties, after several years of record commodity prices in the early 20 tens, commodity prices have been depressed since 2014 and interest rates are beginning to rise again. The resulting financial stress has resulted in significant deterioration in farm income, which will cause a substantial increase in agricultural workouts and bankruptcies unless commodity prices start to increase. Mitigating the growing crisis is the continued concentration of farms into larger farming operations, which, if run properly, can better manage costs through economies of scale and thus better respond to financial challenges. Conversely, for those operators unable to meet the challenges, the resulting financial losses will also be significantly larger. Industry overview. The U. S. Agricultural industry is quite large and diversified. The U. S Department of Agriculture USDA estimated total cash receipts of all agricultural commodities to be approximately $372 billion in 2017 measured in real $2018 which can roughly be split between two larger groupings. One crops representing grains such as corn, wheat and soybeans, and to animals and products representing cattle, poultry and pork. However, across virtually all agricultural segments, total cash receipts have been trending down since 2014. Some segments, including corn, wheat and soybeans, peaked even earlier and have been trending down since 2012. See Figure one, which accompanies the text version of the article, the animals and products category. Although cash receipts have been down since 2014 has not experienced the same level of distress is the crops category. Total cash receipts forecasted for 2017 of $178 billion is below the cash receipts of $184 billion in 2011 and actually up significantly from the $161 billion in 2010. All segments within animals and products are up compared to 2010 whereas most crops segments including corn and wheat, are down compared to 2010 when crop receipts totaled $206 billion. Accordingly, the dairy segment continues to struggle to to lower milk prices. Over the past several years, much of this commentary will be focused on crop farming, which could be seen as exhibiting a greater likelihood of potential and deeper distress in 2018 crop markets today. For crops, total cash receipts factor into account acreage. Planted yields and pricing to best reflect the overall revenue generated from a particular commodity. Although total acreage planted with crops in the U. S. Has largely remained steady in the last several years. At roughly 318 million acres, crops have rotated out of corn and wheat and into soybeans and cotton because of improved relative price versus direct cost margins. further crop yields largely continued their generational trend upward. A scientific advances in seed research improved farming techniques. The primary driver behind the declines in crop cash receipts is the decline in commodity prices over the past several years. Prices of corn, wheat and soybeans all peaked in 2012 reaching levels, sometimes double those of today corn prices proposal were mostly over $6 between 2011 and 2013 peaking at over $8 but they have largely traded it between $3.50 and $4 proposal since mid 2014. Prices for wheat and soybeans who played out similarly, with wheat prices today trading at roughly $4.50 per bushel, or half of its recent peak at $9 proportional in 2012 and soybeans also dropping in price by nearly half, between 2012 and 2014. Although the price declines have largely stabilized over the last several years, they remain at lower levels and would continue to pressure crop producers that have cost structures built around the higher crop prices, offsetting the effects of reduced commodity prices. Farm owners have at least seen farm values largely hold up after a significant run up in prices. The additional real estate value has provided additional collateral value toe lenders, which in turn has generated additional borrowing capacity and enabled farm owners to battle the effects of revenue and associated profitability. Weaknesses. The value of U. S farm real estate has largely been increasing since the last farm crisis in the mid 19 eighties, and increases were particularly strong between 2011 and 2014. When general cash market liquidity was plentiful, interest rates were exceptionally low and crop prices were strong. All the real estate values have since stabilized. Land has generally kept it's value due to continued low interest rates and abundance of capital and the relatively fixed quantity of land. Significant regional differences can exist depending on the predominant crops in specific geographic areas. For example, in a recent workout in western Michigan, average land prices were closer to $6000 to $8000 per acre, substantially higher than the national average of roughly $3000 per acre. While average value per acre of farm real estate in the Corn Belt states of Illinois, Indiana, Iowa, Missouri and Ohio declined 0.5% from 2016 to 2017 and declined 1.7% from its most recent peak. In 2014. However, values were still up compared to 2013. And it does not appear that values have declined so precipitously as to immediately create loan to equity issues with farm loans, impact on agriculture financing and potential loan defaults, there's substantial risk that if commodity prices remain depressed, recent signs and weaknesses and real estate values might increase and overall debt conditions could worsen as net farm income weakens. Overall loan conditions air being stressed and traditional measures of debt such as debt to equity ratios and debt service coverage ratios have weakened. If land values start to decline as they did in the early 19 eighties and farm insolvencies will rapidly increase, see Figure two, which accompanies the text version of the article. Net farm income was down more than 30% from 2013 through 2016 before rebounding slightly in 2017 having increased nearly 4% since 2016. Again, this is aggregate data across the entire agricultural sector, with animal and product profitability increasing year over year, will crops continue to decline, experiencing better results in 2017 where broiler, chickens, milk and hogs while fruits slash nuts and soybeans were expected to have poor 2017 results. Overall farm debt continues to grow, largely propelled by the large recent increase in real estate prices, providing additional collateral to support increased debt capacity. But reduced income has resulted in lower debt to assets and debt to equity ratios on an inflation adjusted basis in 2016 farm real estate debt exceeded its previous all time high set in 1981. The more conservative non real estate debt has kept overall farm debt levels at just below those experienced in the early 19 eighties, see Figure three that accompanies the text version of the article. Overall measures of liquidity are somewhat stable, with debt to asset, and debt to equity ratio is slightly improving. Over the prior year, farms were judged to have a debt to equity ratio 14.4 times for the most recent measurement period in February 2018 and a debt to asset ratio of 12.7 times. Although this might seem high when judged by commercial and industrial standards, it is below the level maintained by the agricultural sector throughout the 19 seventies, 19 eighties and 19 nineties expectations for 2018 and beyond. It appears that the potential for distress is most concentrated in crop farms, as those commodities have experienced the most dramatic price declines and are now beginning to be reflected in the farm real estate values, which were resulting weaker financial measures of health and greater pressure from lenders. Encouragingly, and despite there being perhaps no relief on the immediate horizon for 2018 USDA has projected crops commodity prices to begin rising again and continue increasing of the next 10 years due largely to increasing demand, both domestic and foreign. A recent weakening of the U. S dollar will no doubt help export sales of agricultural commodities produced in the US, although potential trade wars could also target the agricultural sector and create a negative X edginess shock that is not factored into most forecasts In estimating returns over variable costs essentially a contribution margin which factors in pricing yield and growing costs, the USDA mostly projects improvements to most crops segments. If this proves true, US might yet avoided crisis and farming as deep is what was experienced in the early to mid 19 eighties, even with the prospect of rising interest rates. If commodity prices have reached there, a deer and begin to climb once again continued ample cash. Liquidy might have helped prop up real estate prices and stop the degradation of loan characteristics. One other trend that might help mitigate a potential crisis is the continued concentration of farms into corporate hands. See Figure four, which accompanies the text version of the article. In theory, larger, more professionally run enterprises should be better able to diversify crop investments and offset weakness in one segment with strengthen another and generally be better able to respond effectively to changes in market dynamics. To the extent that consolidations are executed poorly and are conducted by operators incapable of handling much larger enterprises requiring additional sophistication, US might yet see further farm workouts that also happen to be larger in scale than previously experienced. Overall, 2018 may very well be a bellwether year for the U. S. Agricultural industry, and in particular for crop farmers. Animal and related products sectors should largely avoid significant distress for crop producers should the early signs of stability and commodity prices hold up and even improve. The sector may also yet avoid repeating the prior farm crisis of the 19 eighties. However, there is a very reasonable possibility that prices will not rise or will even decline, which would increase the level of agricultural distress. The wild card in the agricultural industry is what ultimately happens with trade tariffs. Approximately 20% of U. S crop production is exported to other countries, primarily Canada, Mexico and China. With current federal policy moving toward an implementation of tariffs on select US imports from major trading partners, it is likely that some form of retaliatory tariffs will be placed on US exports, including agriculture. In particular, China has threatened tariffs on soybeans, sorghum and live hogs. If export volumes declined, there will be further pressure on US prices. Thus, the possibility of a trade war is a real threat to the agriculture industry and could spark a crisis itself regardless of price movements. Larger farms that attempted to consolidate prior to the 2012 2013 start of commodity price decreases, especially those that could have financed land acquisitions at unfavorable land prices or at least rates and were not able to upgrade their own levels of operating sophistication to adjust to industry pressures, may continue seeing lender concern potential failures