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Thursday, October 29, 2015

Farmland Prices and Farm Solvency Then & Now

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Farmland Prices and Farm Solvency Then & Now
Gary Schnitkey, Agricultural Economist - University of Illinois

Years of low commodity prices, and losses on the farm, have some wondering whether the agricultural boom-bust cycle of the 1970’s and 80’s is repeating itself. The balance sheets, as Todd Gleason reports, say probably not.

There are some big differences between the farm crisis…
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There are some big differences between the farm crisis of the 1980’s and the current situation in middle America. Then, as now, commodity price had slumped after soaring for a few years. The price of farmland had skyrocketed, too, just like now. However, unlike today interest rates were high and farmers were deep in debt when the price of farmland finally bottomed 42 percent below its high. Gary Schnitkey wanted to know what would happen today in that kind of worst case scenario. So he ran the numbers.

Schnitkey :25 …

Quote Summary - The solvency issues today differ. If we look at the same sort of price decline on farmland, actually a little bit bigger (50%), that we had during the 1980’s and applied that to the typical balance sheet on our farms today, what we would see is the debt to asset ratio go from point-two-zero, which is what it is today, to point-two-six.

This is an increase, and it would cost the typical grain farmer in Illinois $1300 an acre, but it would not lead to insolvency or bankruptcy issues.

Schnitkey :32 …are not being subjected to that price decline.

Quote Summary - A lot of this has to do with the lower debt now. We typically have much lower debt to asset ratios. Also, many of our farms own a relatively small portion of their land base. A typical grain farm in Illinois has about 26% of its acres owned. So, even if that 26% declines in value, there are still a lot of acres controlled that are not being subjected to that price decline.

Over a seven year period in the 1980’s the value farmland fell 42%. The University of Illinois agricultural economist used a decline of 50% for his calculations. The resulting debt to asset ratio moved the needle from the great to ok mark; not even as bad as the early 2000’s on the farm.