Midwest Farm Bubble Continues Collapse As Farm Incomes Expected To Crash In 2017
Earlier this week the U.S Department of Agriculture released its biannual report of farm incomes which paints a very bleak picture for the American farmer. In its first forecast for 2017, the USDA sees real farm cash receipts down 14% versus 2015 and 36% from the previous high set in 2012 as farm debt continues to soar and leverage surges to all-time highs.
As the Wall Street Journal notes, the deadly combination of rising input costs, lower grain prices, a strong dollar and excessive leverage will likely force many of America’s Midwest farmers out of business in 2017.
Costs for seeds, fertilizer and equipment climbed so high and grain prices dropped so low that he still lost more than $120 an acre. Afraid to come up short again, Mr. Scott decided last fall not to plant 170 acres of winter wheat, close to a third of the usual amount. U.S. farmers sowed the fewest acres of winter wheat this season in more than a century.
“No one just grain farms anymore,” said Deb Stout, whose sons Mason and Spencer farm the family’s 2,000 acres in Sterling, Kan., 120 miles east of Ransom. Spencer also works as a mechanic, and Mason is a substitute mailman. “Having a side job seems like the only way to make it work,” she said.
She and her husband have declared bankruptcy before. Farmers around Sterling lost $6,400 on average in 2015, the latest available data, after profits of $80,800 a year earlier, according to the Kansas Farm Management Association.
Meanwhile, America’s share of the global grain trade has been cut in half since the 1970’s giving domestic farmers less control over pricing which has grown increasingly volatile over the past decade.
The U.S. share of the global grain market is less than half what it was in the 1970s. American farmers’ incomes will drop 9% in 2017, the Agriculture Department estimates, extending the steepest slide since the Great Depression into a fourth year.
“You keep pinching and pinching and pretty soon there’s nothing left to pinch,” said Craig Scott, a fifth-generation farmer in this Western Kansas town.
American farmers’ share of the global grain trade has fallen from 65% in the mid-1970s to 30% today, giving them less sway over prices. More producers and more buyers around the world also mean more potential disruptions from bad weather, famine or political crisis.
Corn prices once varied year-to-year by less than $1 a bushel. Since 2006 they have shot up and dropped more than $4 a bushel.
So where does that leave the American farmer? Real farm incomes in 2017 are expected to sink below 2010 levels which represents a 36% decline from the recent peak and a 14% decline since 2015.
Meanwhile farm debt continues to rise at an astonishing rate…
While farmer leverage has spiked to the highest level since at least 1960.
And of course, lower incomes means less money to spend on shiny new John Deere tractors with equipment capex expected to decline 35% compared to 2015.
And finally, farmer returns have crashed to the lowest levels ever. We’re not sure about you but a 2.1% ROIC seems a “little low” even in our current rigged interest rate environment. So, there’s only a couple of ways to fix that problem…either commodity prices have to recover quickly or farmland prices need to come down substantially. Which do you think will happen first?