Land prices are always a hot topic in farm communities, and like most farmers, I’ve gathered with neighbors after an auction of local farm ground to forecast the imminent financial demise of the farmer who bought that piece of ground I would have loved to own. Of course, me and the rest of the coffee shop experts were wrong, as land prices have been on an extended bull run. Since the early 1990s, U.S. agricultural land prices have increased 169 percent in real terms.

That extraordinary bull market is likely coming to an end.

Yeah, I know I’ve been wrong for a generation, but this time I really mean it!

Most observers of the land market are very cautious about predicting farm real estate prices, usually forecasting a flat land market like the one we’ve seen the past year or two. They’ll acknowledge the downward trend in farm income, the upward trend in interest rates, and the tariff battles, but then they’ll talk about the strong agricultural balance sheet and conclude that the next few years will likely look a lot like the recent past. Since I have no academic reputation to protect, I won’t be so hesitant. Farmers are in for a tough few years, and I fully expect that land prices will drop over the next couple of years by a substantial amount.

I’m worried because so many of the articles I read about this subject strike me as the financial equivalent of whistling past the graveyard. Yes, agriculture’s balance sheet is strong, showing an overall debt-to-asset ratio of less than 15 percent.

But there are two problems with the use of this ratio as an indicator of financial health. First, the denominator. Something like 83 percent of all farm assets is farm real estate. If land prices drop, our debt to asset ratio can change in a hurry, even if the overall debt level remains the same. People compare 1985 levels to our present numbers and conclude that we are a long ways from a problem. But in the 1980s, by the time the debt to asset ratio started to deteriorate, farmers were in a world of hurt.

Secondly, the numerator is also a problem. Debt is not evenly distributed across farms. In fact, it’s pretty skewed. I’ve seen statistics that say that up to 70 percent of farms have no debt at all. Now, many debt free farms are smaller, with operators who earn most of their income off the farm, but the fact remains that farm debt is concentrated. 

Sector-wide balance sheets tell us very little. The University of Minnesota runs a farm record keeping system that enrolls just under 3,400 Midwestern farms. These are bigger, more commercial operations. Even so, around one-fifth of those farms have debt well under twenty percent of their assets, pointing to a much higher concentration of debt in the remaining farms.  In 2017, over 20 percent of the farms in the Minnesota survey had debt to asset ratios of over 80 percent. In this survey, as with the rest of the farm economy, debt is concentrated in farms that will struggle over the next few years.    

A better indicator of the financial situation on farms is a comparison between debt and the income available to service that debt. Here the numbers are headed south much more rapidly than debt to asset comparisons: In 2013, total farm debt was $315 billion; Today, it’s $409 billion. In 2013, net farm income was $123 billion; Last year, net farm income was $66 billion.

The drop in farmers' fortunes is clear on other numbers in the ag sector balance sheet. For example, in 2012, farmers held $144 billion in cash on their balance sheets, but by 2017 cash had dropped to $82 billion. John Newton of the American Farm Bureau Federation has compared farm debt to farm income and found that the 2018 ratio was at a 32-year high.   

A recent national survey of farm lenders by the Kansas City Federal Reserve has further strengthened the case that farm borrowing is increasing at a time when the income available to service that debt is falling. For the year 2018, lenders report a 12 percent increase in non-real estate debt. Operating loans increased 22 percent.

Not only that, but interest rates are increasing. Only about one-third of farm debt is financed with variable rate loans, but increasing interest rates put increased pressure on the farms with high debt loads. In 2015, nearly half of all non-real estate farm loans carried an interest rate of less than 4 percent.  By the fourth quarter of 2018, 40 percent of non-real estate loans carried a rate of over 6 percent. The cost of borrowing on most farms is still moderate. According to the Fed, corn and soybean farms with 50 percent of their operating costs financed by debt have seen an increase in interest costs of about $10 per acre. That’s a small amount compared to the interest rate tsunami that swept through agriculture in the 1980’s, but for a farmer operating thousands of acres, it is not inconsequential.

More importantly, increasing interest rates make other investments more attractive than farmland. A major contributor to the extended runup in farm real estate values has been the dearth of alternative investments with good rates of return.  As bond returns increase, farmland becomes less desirable, putting more pressure on farm balance sheets.

Increasing debt, decreasing income, and increasing cost of debt are trends that point to the forced sale of assets. Farm bankruptcies and nonperforming loans are increasing. We’re all aware that these trends are occurring but we are reluctant to draw the ever more obvious conclusions.

According to Greek mythology, Cassandra was cursed with the ability to forecast the future and the knowledge that nobody would believe her. But in my mind, Cassandra is not seen as unfailingly correct, but rather always pessimistic, forecasting doom at every turn. The Cassandra of my imagination and my grandfather had a lot in common. My grandfather was born in 1900 and spent the next 98 years preparing for the return of the Great Depression. It’s sort of embarrassing to realize that I now sound like my grandfather. Just like him, I have the ability to predict 10 of the next 1 farm recessions. So, the good news is that I’m probably wrong.

The bad news is that it will take a lot of good fortune to turn the agriculture economy around. It will take a renewed commitment to the Renewable Fuel Standard to protect the ethanol market. We’ll need at least a pause in the upward movement in interest rates and the dollar. Congress must quickly approve the USMCA, and the Trump Administration will need to resolve our trade dispute with China without picking a fight somewhere else in the world. The six years of above trendline yields and production must be interrupted. As fun as it has been to set new yield records each year, demand can’t possibly keep up with the production increase we’ve seen so far this decade. It would be good if we rejoined the Trans-Pacific trade agreement. Oh, and it would help our long run prospects if the ceaseless criticism of meat - particularly beef — as the cause of all global environmental evil would end.

I hope all or most of those things happen, but they probably won’t. I’m not so confident in my gloomy forecast that I wouldn’t be interested if a small tract, say, an 80, came up for sale near my farm. Just in case I’m wrong. With that mix of pessimism and acquisitiveness, I’m like most farmers. Which is why land prices stay strong much longer than they should and why the correction will be large and painful when it comes.

About the author: Blake Hurst is a third-generation farmer and president of the Missouri Farm Bureau board of directors.