Reuters / U.S. grain farmers are being warned not to fall into the trap of borrowing against inflated land values.
A new report by the Kansas City Federal Reserve says farm incomes “could fall dramatically in 2014,” and that might tempt farmers to borrow against their land.
The report cautions “the stage is set for another wealth effect and leveraging cycle in U.S. agriculture.”
In past farm booms and busts, such as the 1910-20 and 1970-80 periods, U.S. farmers built debt even as incomes fell and interest rates rose. By contrast, U.S. grain farmers have used the latest boom to retire debt, even as land prices set new records. But that’s also a warning sign as farmers tend to accumulate more debt when wealth levels are high.
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“Today, an increase in farm debt may signal the beginning of another turning point in farm debt and leverage,” the study says. “After rising less than one per cent annually since 2008, farm debt outstanding at commercial banks rose roughly five per cent in the fourth quarter of 2012.”
The latest USDA forecast predicts net farm incomes to fall 20 to 25 per cent this year and remain near these levels over the next decade. As well, many now expect interest rates to be two per cent higher by 2015.
“History has shown that a combination of falling profits and rising interest rates drive farmland prices lower,” the study states.
Current farm debt ratios remain near historical lows, and farmers should strive to keep it that way, it adds.
“Working capital is the first line of defence farmers can use to manage through periods of weak profitability,” the study says.
