Soaring farm operating costs, not record high land values feared by economists of possibly causing a repeat of the 1980s farm crisis, pose the greatest risk to U.S. farmers, the head of the country's largest farm management company said on Tuesday.
CEO of Farmers National Company, Jim Farrell, told Reuters steep increases in cost of fertilizer, seed, fuel and machinery are the main concerns for farmers.
Farrell cautioned that if commodity prices slide from current levels, say corn falls 50 percent to $4, "some of the more marginal operators are going to have a hard time holding things together," given the record high operating costs of planting and harvesting crops.
Oil prices alone have more than trebled since their lows of 2008 at the start of the global financial crisis.
Land values have also skyrocketed in recent years, hitting record highs across the Midwest and Plains this autumn, stirring fears about the possibility of a ruinous farmland bubble like the one seen in the 1980s. But farmers are carrying much less debt today, thanks to record incomes in recent years.
"In the late ‘70s and ‘80s we had incomes going down and expenses going up," Farrell said. "Today it's not that way. We are seeing substantial increasing input costs but we are also keeping pace at this point with income.
"It wasn't land values in and of themselves that created the 1980s. It was the extremely high input costs and the total lack of income. Then credit tightened. If you needed money, you couldn't get it," Farrell said on the sidelines of a bankers' meeting sponsored by the Federal Reserve of Chicago.
"I'm not sure we are focused on the right risks. We try to look as those land values as the risk, and I don't know that they are actually the risks," said Farrell, who was a struggling Iowa farmer in the 1980s when over-leveraged farmers lost their land as interest rates jumped.
The U.S. Agriculture Department on Tuesday forecast that 2012 U.S. farmer income would be a near record at $114 billion despite this year's drought.
Farm assets will rise to $2.54 trillion in 2012, up 26 percent from 2008. Of those 2012 assets, $2.2 trillion is represented by farmland. Farm debt is projected up nearly 10 percent from 2008 to $266 billion in 2012.
So both debt-to-equity and debt-to-asset ratios for farmers are down sharply due to record high crop prices and farmland prices. The strong prices are the result of a booming biofuels industry, record food exports and low interest rates.
FARMLAND VALUES SEEN RISING
But Farrell remains bullish on farmland prices through early 2013.
Farmland fetched as much as $15,000 to $16,000 an acre in the Plains this fall, despite the worst drought to hit the United States, the world's top food exporter, in more than 50 years. In Iowa, the biggest crop state, an 80-acre parcel of crop land in northwestern portion of the state sold for a record $21,900 an acre in October.
"We don't see anything to slow the market down," said Farrell, noting that Farmers National, based in Omaha, sold $163 million in land just last month.
Farmers rushed to sell land over the past six months amid worries about higher capital gains taxes, he said. That could mean fewer farms for sale in the first quarter of 2013.
"If we have very few sales over the first quarter will that even stoke more demand?" he asked.
Asked about recent weather and climate risks, Farrell said a repeat of the drought in 2013 may have a negative impact on land values and the United States could lose its clout as the world's top supplier of food.
He noted that Farmers National, which currently manages 4,700 U.S. farms representing 2 million acres, is looking to expand into Canada as row-crop production moves north given changes in climate.
"We have several hundred farms on the Canadian border near Grand Forks, North Dakota, that we manage, so for us it's organic expansion," Farrell said. "We have not done business there but climate change will allow us to build if it continues."
(Reporting by Christine Stebbins; Editing by Bob Burgdorfer and Jeremy Laurence)