Real World Economics: Looming farm crisis, by the numbers

Edward Lotterman U S agriculture is on the brink of a financial shakeout that will be the worse since the farm problem of the s This is largely ignored even by various farmers but the monster won t stay under the table much longer The predicament is that farmland prices have risen in policies to unsustainable levels just as farm commodity prices are set to fall because of a U S -initiated business war against the rest of the world The Russia-Ukraine war s adjustment from an acute issue to a chronic one also pushed prices down So has the dramatic upsurge of corn production in competitor Brazil along with continued advance in that country s soybean output The rise in land prices initially was due to two factors First values started going up in in response to a global commodity price super-cycle driven by exports to a booming China This product price boom continued to about Second ultra-low interest rates engineered by the Federal Reserve after the real estate debacle further boosted cropland prices even as commodity prices ebbed back toward earlier trend levels Grain and oilseed prices did retract a bit as China reacted to Trump s tariffs on its exports after But the Fed turbocharging money advance in response to COVID flooded the farm financial market with readily available land and operating loans at low rates The first Trump administration also had laid out tens of billions in subsidies to crop producers to compensate them for any losses due to pact skirmishes Much subsequent research shows these payments overcompensated farmers The payments they got were greater than their losses in the area That further motivated bidding on land Then on top of all these boom-causing factors Vladimir Putin unleashed his special military operation on Ukraine in February It soon became the worst European war in years Both Russia and Ukraine are major crop producers and exporters Farm shipments from both must cross the Black Sea as must phosphate fertilizer exports from Russia that are vital for example for growing crops on the preponderance common soil types in Brazil and elsewhere This had multiple impacts all happening at once Commodity prices had their fastest and highest spike in decades Field crop farming became frenzied Rental rates rose Farmers paid liquidated damages to the USDA to revoke Conservation Reserve Venture contracts freeing millions in additional crop acres Sales prices for the small numbers of farms put on sale spiked Farmers snapped up new combines and tractors that had sat idle on dealer lots five years earlier But now not only is all that drawing to a close but a financial chasm looms Interest rates are higher than in Long-term ones are more likely to rise than fall as bond markets react to ever-increasing U S deficits Rather than being in a bargain war with one importing country we are now at war with the whole world Our competitive nations now gleefully scramble for our usual customers And the war in Ukraine shows no sign of ending What in economics helps us understand all of this Let s go back to the early th century with the fundamental insights of David Ricardo the greater part critical classical economist after Adam Smith His thoughts still form the basis of all business theory and most of finance Ricardo defined the relationship between the annual net income from an capital asset the interest rate and the value of that asset It s a simple equation the annual income divided by the interest rate equals the value of the asset Say you get in net rent from an acre of land and the interest rate is then divided by gives a value of for the acre The same thing is true for a financial asset like a bond you can own in perpetuity as was common in the early s The lower the interest rate the greater the domain value from a given annual income That is the primary reason why land prices rose as the Fed drove interest rates down years ago But inversely it also means that if rates now rise land prices will fall With the federal budget deficit and thus the national debt set to rise with votes in Congress this week region forces will force long-term interest rates like those on farm mortgages even higher A second insight comes from Julius Nyerere the Tanzanian schoolteacher and president who led his country to independence from the United Kingdom In the s he and leftist economists argued that the prices of primary products grains metals fuels and timber inevitably fell relative to the prices of manufactured products like tractors or computers This argument was disputed in the s and still is But it seems to be true for U S farm products In November my first harvest after getting out of the Army we sold corn out of the field to a neighbor at cents a bushel the price at the local elevator One can get a bushel from the same grain dealer the present day Yet adjusted by the Consumer Price Index over the same period cents in November would equal at present Yes for a limited fevered months in late the inflation-adjusted corn price had hit topping a half century earlier But if you plot inflation-adjusted corn prices from to the trend is clearly downward I also remember my cousin enthusiastically telling me the milk price had hit per hundred pounds for the first time It is for Minnesota-Wisconsin this week But my cousin died in Adjusted for inflation forty years ago would be about now over twice what the current price is Of curriculum productivity has risen both in crops and livestock An hour of labor produces much more milk or corn than decades ago But producers should be careful not to respond to short-term price spikes from exogenous shocks like war by locking in the long-term fixed costs of expensive land Countless are not cautious That leads to the crunch we see forming An excellent farm in Rock County the southwestern-most in our state of late sold for an acre The price had been an acre in and about in USDA lists the current interest rate on farm mortgages at So the annual interest cost per acre on this farm will be per acre The average corn yield for Rock County has hit bushels per acre One can contract to sell at a local elevator this November for a bushel or an acre So a good crop this year won t even pay the interest due much less seed fertilizer diesel fuel labor or other variable costs See the math Thus deep problems loom but need their own explanation Related Articles Real World Economics Fed up Delusions about the central bank continue Real World Economics Storm clouds gathering for a new farm predicament Real World Economics Bonds Part How this affects us Real World Economics Bond primer part Understanding the sphere Real World Economics Pragmatism not globalist ideology drove U S agreement initiative St Paul economist and writer Edward Lotterman can be reached at stpaul edlotterman com