Attracting and retaining the next generation of farm operators has been a persistent struggle in U.S. agriculture. Over the past century, productivity gains in U.S. agriculture have led to the consolidation of farm enterprises into larger operations, limiting opportunities for farm ownership and triggering an exodus of young farmers from the industry. Although the recent surge in farm prosperity has rekindled interest in U.S. agricultural production, the increasing age of farmers and rising costs of farming have generated concerns about the ability of the next generation to enter the farm business.
Wind power, with its recent dramatic pace of development, has the potential to alter the energy landscape in some areas of the United States. Before 2006, wind power development was sparse. However, installed capacity doubled by 2008 and accelerated rapidly through 2012. Although wind power still accounts for a small share of the nation’s electricity supply, the recent surge in development has sparked discussion about wind’s potential as a significant source of long-term renewable energy.
Since 2009, wealth in the U.S. farm sector has surged along with booming farmland values. Similar to nonfarm households, farm enterprises historically have used wealth to support consumption and investments when income fades. During years of low income, farmers tap their existing wealth to finance spending on capital investments such as buildings, vehicles, machinery and other equipment. Thus, similar to nonfarm households, the wealth effect often leads to sharp increases in debt and leverage in farm enterprises.
Despite a severe drought, profits in the U.S. farm sector soared in 2012. Beginning in late June, U.S. crops and pastures wilted under one of the worst droughts in history. Although total farm incomes remained high, the drought exacerbated a widening gulf in profitability between the crop and livestock sectors.
The 2012 drought has reignited the food versus fuel debate. After cutting U.S. corn production below recent years’ consumption, the drought sparked a U.S. grain shortage and sent global food prices soaring. As the grain shortage intensified, pressure to relieve the shortage by easing ethanol mandates mounted.
Farmland is a bellwether to the financial health of the U.S. farm sector, accounting for 85 percent of U.S. farm assets. Its value is typically based on the expected revenues from agricultural production. Sparked by surging grain prices, U.S. farmland values soared to record highs at the end of 2010. However, the double-digit gains in cropland values outpaced the rise in cash rents. Thus, many observers question the sustainability of such high land values and suggest that other factors, such as low interest rates, are driving current farmland values. Farmland values often rise with persistently low interest rates and strong crop prices. Low interest rates lift farmland values by reducing the discount on the future income stream produced by the land. In addition, low interest rates depress the value of the dollar, which in turn boosts agricultural exports, raises commodity prices and enhances farm revenues. Conversely, rising interest rates can reduce farmland values by widening the discount on the value of future income streams. In addition, research has shown that higher interest
Today's soaring farmland values have boosted farm wealth and driven the U.S. farm balance sheet to its strongest level since the 1970s farm boom. In fact, the U.S. Department of Agriculture (USDA) projects 2011 real farm equity to surpass the record highs of the 1970s. Since farmland is the largest asset on a farm balance sheet, rising land prices have pushed U.S. farm debt-to-asset ratios to record lows. While the industry's overall debt-to-asset ratio is low, some producers have much higher debt-to-asset ratios. In many cases, these producers have more elevated levels of non-real estate farm debt. If farmland values were to fall sharply, as they did in the farm crisis of the 1980s, both farm balance sheets and farm wealth would suffer, especially for farmers with high levels of non-real estate debt. This article explores the effects of falling farmland values on farm balance sheets, wealth and insolvency. The analysis finds that most producers with a high risk of insolvency tend to carry significant levels of non-real estate debt. Further, most of the operations in this high-risk group tend to be large, with more than $1 million in farm sales— or they tend to be operated by farmers under the age of 35. Echoing the 1980s farm debt crisis, producers with higher levels of non-real estate debt would face the greatest risks to farm bankruptcy if land values fell sharply. Strong farmland values have bolstered today's farm balance sheets. During the last decade, gains in farm asset values, led by farmland, have outpaced rising farm debt levels. The result has been a 45 percent surge in farm wealth—a windfall similar to that of the farm boom of the 1970s (Chart 1). In addition, rising net worth levels for farmers have helped push debt-to-asset ratios to record lows, thus reducing the risk of insolvency. Farm assets, in particular farmland values, drive shifts in farm wealth. … " producers with higher levels of non-real estate debt would face the greatest risks to farm bankruptcy if land values fell sharply " …
Fiscal challenges at state and local governments are a potential threat to the economic recovery in rural America. Rural communities depend heavily on intergovernmental transfers from the states to provide local services. Many people in rural communities rely on the state or local government for their jobs and on Medicaid as part of their income. Thus, rural economies are highly susceptible to state budget shortfalls. As state governments cut spending in response to looming budget deficits in coming years, rural America's fiscal problems may also deepen.
In 2008, surging commodity prices triggered promises of a new golden era for agriculture. While prospects dimmed during the recession, the recovery is rekindling hopes with rising commodity prices. On June 8 and 9, more than 180 agricultural business and finance leaders examined agriculture’s potential at the Federal Reserve Bank of Kansas City’s symposium, “Farming, Finance and the Global Marketplace.” Participants discussed how changes in the global marketplace are likely to affect the profitability and structure of agriculture.
In 2010, rural America was at the forefront of the economic recovery. As sluggish job growth reined in the U.S. economy, rural firms harnessed stronger global commodity demand and raced ahead of their metro peers. In fact, rural job growth sped up in the second half of the year with jobs stretching 2 percent above year-ago levels in the third quarter, outpacing metro gains. In addition, rising exports of farm commodities and manufactured goods spurred job and income gains in rural communities, fueling optimism for economic prospects in 2011.
Farmers have significantly increased their debt levels in recent years. Since 2004, real farm debt has risen nearly 5 percent annually, the fastest increase since the prelude to the 1980s farm debt crisis. Today’s rising debt raises questions about whether U.S. farm operations will face financial stress in the future.
Farmland values have skyrocketed in recent years. From 2004 to 2008, booming farm incomes, driven by strong export and ethanol demand, teamed up with robust nonfarm demand to fuel a 60 percent rise in U.S. farmland values. At the same time, demand for residential development and recreational use pushed up the value of farmland transitioning out of agriculture. Overall, the surge in values was the sharpest appreciation since the 1970s, when a Russian grain deal sparked a farm boom that was quickly capitalized into record land values. The recent recession cut farm incomes and also cooled residential and recreational demand for farmland. Near the end of 2008, farmland values edged downward and since then have held relatively steady. Still, concerns remain about the future path of farmland values. Volatility has invaded agricultural commodity markets, and the prospects of higher capitalization rates are all too real, raising uneasy comparisons to the 1980s. Are today’s farmland values another bubble getting ready to burst? This article analyzes the recent trends in farmland values and examines the factors that will shape future values. First, the article discusses the sharp run-up in farmland values and the sudden cooling-off during the recession. Next, it examines the key effects of residential and recreational demand on farmland values. Finally, it describes how two factors—profitability from crop production and changes in capitalization rates—could influence future values. The article concludes that, despite current volatility in farmland markets, a collapse in farmland values like the one seen in the 1980s is unlikely.
Agricultural borrowers are increasingly concerned about access to credit. Amid economic weakness and a financial crisis, commercial banks have tightened credit standards for various types of loans. While agricultural borrowers may be concerned about credit availability, agricultural lenders are equally concerned about the creditworthiness of agricultural borrowers as the farm economy weakens.
Over the course of the recent recession, rural economies have held up better than their metro peers, thanks to strong rural economic gains early in the downturn. Even so, since 2007 rural communities have endured the steepest and longest economic contraction since the Great Depression. With the worst now over, prospects for a rural recovery appear to rest on rebounding consumer demand. But a jobless recovery may keep the lid on domestic demand, making stronger export activity another critical factor for rural prosperity. Stronger demand and exports can reverse the cyclical downturns experienced during the recession. But many of the long-term structural challenges facing rural America remain: Out-migration is growing, industries are consolidating, and access to financial capital remains tight. In short, the longterm health of rural America in the 21st century will rest on developing policies that focus on amenity-based development, entrepreneurship, and innovation.
