Process Management

News last update:6 Aug 2012

Strong US farm economy faces crisis

Soaring land values, increasing debt and a reliance on government subsidies for ethanol production have prompted economists to warn that what some describe as a golden age of agriculture could come to a sudden end.

The potential problem, economists said, is that strong demand for corn and other grains has caused prices to reach historic highs.

That has led to record farmland values and steadily increasing debt as farmers borrow money to buy more land, finance the higher costs of fertilizer and seed and upgrade their equipment.

As long as the demand remains, good times for farmers should continue. But if demand falls, the agricultural economy could collapse.

Among factors that could affect demand would be:

  • A change in the federal government's policy on ethanol subsidies (now estimated at about $6 billion a year);
  • Revisions in the farm bill that would lower support payments or,
  • An increase in the dollar's value, which would hurt exports.
Farm economists question whether the federal backing for ethanol will continue in the face of complaints that soaring corn prices are increasing food costs. Corn is used in most animal feed and is a key ingredient in myriad other products.

Economists worry that farmers could be tempted to add debt due to the belief that high commodity prices would continue.

Those prices have been driven up by a strong demand for corn and soybeans from countries such as China and India, coupled with the needs of more than 50 corn-reliant ethanol plants built in the last few years.

As prices have climbed, so have farmland values. In Iowa, the nation's biggest corn producer, the average price of farmland has increased 67% in the past five years.

Farm debt increases
According to the US Department of Agriculture, farm business debt is expected to reach $228 billion by the end of this year, an $8 billion increase from last year and a new record for the fourth consecutive year.

Debt for land is expected to rise to nearly $121 billion this year, a 2.8% increase.

And the USDA said from the beginning of 2003 to the end of 2008, total farm debt will have increased by about $52.8 billion, or more than 30%.

Recent reports filed by agricultural lenders shows the government's expectations are playing out in reality.

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