An abstract for this article is not availableFarm income

Sada L. Clarke

English

Research Papers in Economics

Sada  L.  Chrke 
The  winter  of  1977-78  may  well  be  remembered  as 
the  winter  of  farmers’  discontent.  Many  of  the 
nation’s  farmers,  faced  with  rising  production  costs, 
low  prices,  depressed  incomes,  and  heavy  indebted- 
ness,  banded  together  to  seek  better  prices  for  their 
products.  With  many  producers  in  financial  diffi- 
culty,  a  wave  of  rural  unrest  swept  across  the  coun- 
try.  Farmers’  sign-draped  tractor  and  truck  caravans 
parading  through  Washington  and  other  major  cities 
to  protest  low  farm  prices,  their  threatened  “strike,” 
their  battle  cry  of  100  percent  of  parity  prices-all 
in  an  attempt  to  increase  their  incomes-were  evi- 
dences  of  farmers’  angry  mood. 
History  records  that  farm  prices  have  never  been 
supported  at  100  percent  of  parity.  While  it  is 
doubtful  that  all  farmers  know  just  what  fuI1 parity 
really  means,  they  apparently  are  not  alone.  Few 
people  probably  understand  parity  or  realize  what 
full  parity  would  actually  cost. 
Today’s  farmers  may,  or  may  not,  understand 
parity.l  But  what  they  do  understand  is  that  farm 
prices  slumped  in  1977  on  the  heels  of  progressively 
low  prices  since  1974,  while  the  costs  of  farm  inputs 
kept  rising.  Moreover,  it  is  quite  clear  to  them  that 
they’ve  netted  less  money  almost  every  year  since 
the  record  level  in  1973.  Meanwhile,  farmers  have 
continued  to  increase  their  debts,  which  limits  their 
ability  to  repay  loans.  They  know,  too,  that  it  takes  a 
lot  more  corn,  wheat,  and/or  soybeans  to  buy  items 
for  farm  production  and  family  living,  or  to  pay  off 
a $1,000  debt,  than  it  did  a few  years  ago. 
Grain  Producers  Hit  Hardest  Of  course,  the 
buying  ability  of  all  farm  products  has  not  declined 
equally,  nor  -have  all  costs  risen  equally.  Farmers 
1 The  parity  price  of  a  farm  commodity  is  the  price  (cal- 
culated  by  a  complex  formula)  that  will  give  a  unit  of 
that  commodity  the  same  purchasing  power,  in  terms  of 
goods  and  services  bought  by  farmers,  as  that  farm  prod- 
uct  had  in  a  selected  base  period  (1910-14).  during  which 
the  price  relationships  were  considered  to  have  been  rea- 
sonably  well  balanced.  To  illustrate:  Whenever  a  com- 
modity,  such  as  corn,  is  selling  at  parity,  a  farmer  can 
seff  a  bushel  and  buy,  say,  as  much  food  as  he  could  with 
a  bushel  of  corn  during  the  period  1910-14.  When  the 
price  is  below  parity,  the  farmer  can  buy  less;  when  it  is 
above,  he  can  buy  more. 
hurt  most  are  the  grain  producers,  followed  by  cattle- 
men  who  are  now  finally  beginning  to  recover  from  a 
3-  to  4-year  slump  in  cattle  prices.  Nor  are  all 
farmers  in  debt.  Well  over  one-third  of  the  nation’s 
farmers  were  estimated  to  be  debt  free  at  the  begin- 
ning  of  1977.  Evidence  indicates  that  operators  of 
large  farms  were  much  more  heavily  indebted  than 
were  the  small  farm  operators. 
More  Refinancing  Because  of  the  poor  cash-flow 
position  of  many  farmers  brought  on  by  the  slump 
in farm  prices,  many  farm  borrowers  had  loan  repay- 
ment  difficulties  last  year  and  many  had  to  request 
loan  renewals  or  extensions.  ?vloreover,  many  oper- 
ators  found  it  necessary  to  convert  their  short-  and 
intermediate-term  loans  into  loans  secured  by  farm- 
land.  This  restructuring  of  debt  not  onIy  enables 
farmers  to  spread  out  their  payments  and  takes  the 
pressure  off  their  cash  flow  but  also  provides  lenders 
with  more  security. 
No  Farm  Credit  Crunch-  ?Vhile  farmers’  demand 
for  credit  continued  strong  in  1977,  supplies  of loan- 
able  funds  from  traditional  lenders  were  generally 
adequate  to  meet  the  demand.  Furthermore,  the 
SBA  and  FmHA  provided  additional  loan  fund 
assistance  to  farmers  in  disaster  areas.  Generally, 
bankers’  regular  farm  customers  did  not  find  it  diffi- 
cult  to  get  needed  credit.  Most  lenders,  it  seems, 
have  been  willing  to  assist  borrowers  who  have  run 
into  repayment  problems.  Overall,  lenders  say  that 
only  a  few  borrowers-about  5  percent-have  be- 
come  unsatisfactory  credit  risks. 
District  Versus  Nation  This  picture  of  the  na- 
tional  farm  financial  and  credit  situation  mirrors 
conditions  in the  District  pretty  well.  The  one  excep- 
tion  would  seem  to  be  the  likelihood  that  the  propor- 
tion  of  District  farmers  with  cash-flow  problems  may 
he  a  shade  larger  than  in  the  nation  as  a  whole. 
The  Situation  in  Perspective  To  put  current 
farm  financial  conditions  in  perspective,  it  is  helpful 
to  study  the  key  financial  relationships  shown  in  the 
FEDERAL RESERVE BANK  OF  RICHMOND  9 10  ECONOMK  REVIEW,  MAY/JUNE  1978 accompanying  charts2  This  longer  term  perspective 
showing  the  changing  fortunes  of  farming  reveals 
that  the  current  situation  is both  highly  unusual  and 
potentially  troublesome. 
Chart  1  The  sharp  gains  in  total  net  income  of 
farm  operators  that  occurred  during  the  concluding 
years  of  the  World  War  II-Korean  War  boom  were 
followed  by a cost-price  squeeze  on  net  income  during 
the  remainder  of  the  1950’s.  Net  income  shifted  to  a 
slow  uptrend  in  the  1960’s.  Farm  prices  and  income 
in  the  early  1970’s  were  driven  up  significantly  by  a 
combination  of  circumstances-shortfalls  in  world  P 
grain  production,  the  drawdown  in  stocks  of  the 
major  grain-exporting  countries,  the  massive  grain 
sale  to  Russia,  the  disappearance  of  anchovies  off 
the  Peruvian  coast,  and  other  causes.  The  peak  in 
farm  operators’  total  net  farm  income  came  in  1973, 
and  farm  prices  peaked  in  1974.  But  better  world 
crops,  especially  in  the  last  two  years,  have  reversed 
the  situation.  By  1977,  total  net  farm  income  had 
dropped  36 percent  from  its  1973 level.  Moreover,  its 
purchasing  power  in  constant  (1967)  dollars  had 
fallen  55  percent  and,  with  the  exception  of  1976, 
was  at  its  lowest  level  since  1964.  On  a  per  farm 
basis,  operators’  total  net  income  from  farming  in 
constant  dollars  was  about  $4,19O--down  from 
around  $8,800  in  1973  and,  except  for  1976,  the 
lowest  since  1968. 
Chart  2  Although  outstanding  farm  debt  has 
been  trending  upward  since  the  mid-1940’s,  farm  debt 
(extruding  CCC  loans)  increased  by  a  record  $14 
billion  or  14 percent  in  1977,  following  a  gain  of  $11 
billion  or  12  percent  in  1976.  Both  real  estate  and 
non-real-estate  debt  contributed  to  the  rise.  Histori- 
cally,  net  increases  in farm  debt  of  the  magnitude  of 
14  percent  in  a  single  year  tend  to  occur  in  boom 
years  for  farm  income and  investment,  such  as  1950- 
51  and  1973,  rather  than  in  years  like  1977  when 
farm  income  was  relatively  depressed  and  had  few 
prospects  for  significant  near-term  improvement. 
Chart  3  The  value  of  farm  assets  rose  gradually 
through  the  1950’s  and  1960’s  and  then  literally 
shot  upward  in  the  early  1970’s,  exceeding  $700 
billion  by  January  1,  1978.  Rapidly  accelerating 
farm  real  estate  values  were  the  chief  cause,  for 
3 The  analyses  accompanying  Charts  3-6  rely  heavily  on  a 
report  by  Emanuel  Xelichar,  Division  of  Research  and 
Statistics,  Board  of  Governors  of  the  Federal  Reserve 
System.  See  Emanuel  Xelichar,  “Agricultural  Finance 
Commentary,”  Board  of  Governors  of  the  Federal  Re- 
serve  System,  Vl’ashington,  November  1977,  pp.  l-15 
(Mimeographed.) 
farmland  accounts  for  from  two-thirds  to  three- 
fourths  of  the  value  of  all  farm  assets.  By  raising 
the  value  0:’ assets  and  thus  also  the  equity  of 
farm  proprietors,  the  advance  in  farmland  prices 
in  the  1950’s helped  to  push  the  annual  return  from 
production  down  to  around  3  percent  of  equity  as 
shown  in  Panel  B.  Continued  increases  in  land 
prices  during  the  1960’s  and  early  1970’s  kept  the 
return  at  ro;lghly  this  same  level.  Favorable  farm 
income  triggered  a  land  price  explosion  in  1972-73, 
and  returns  ro  farm  proprietors’  equity  in  produc- 
tion  assets  moved  up  to  some  10  percent.  Since 
19i3,  however,  farmland  prices  have  continued  to 
rise  in  the  face  of  declining  net  income.  Returns 
FEDERAL RESERVE BANK  OF  RICHMOND  11 through  1974  and  1975,  on  the  average,  continued 
high  enough  to  support  the  gains  in  land  prices. 
But  by  1977,  the  combination  of  depressed  income 
and  high  prices  of farmland  reduced  returns  to  equity 
to  around  2  percent-only  one-fifth  the  record  rate 
in  1973.  With  farm  income  settling  near  the  floor 
provided  by  government  programs,  a  key  support 
for  further  land  price  gains  is  now  missing. 
Chart  4  Favorable  farm  income,  as  pointed  out 
earlier,  triggered  the  recent  explosion  in  land  prices. 
By  the  late  1960’s,  however,  land  market  participants 
and  analysts  had  noted  the  steady  capital  gains  that 
appeared  to  be  providing  a  significant  supplement 
to  net  farm  income  and  were  discussing  the  concept 
of  “total  returns”  to  farm  investment.  However, 
those  who  add  capital  gains  to  income  to  calculate  a 
“total  return”  to  the  farming  sector  should  also  note 
that  only  the  amount  by  which  the  price  appreciation 
Nominal Capital Gains 
of  farm  assets  exceeds  general  price  inflation  repre- 
sents  a  gain  in  real  terms  to  owners  of  farm  assets. 
Comparison  of  real  net  income  and  real  capital  gains 
in  Panel  B  reveals  that,  in  real  terms,  capital  gains 
over  the  last  five  years  average  slightly  less  than 
income,  rather  than  eclipsing  income  as  one  might 
suppose  after  viewing  nominal  gains  only.  Also,  in 
constant  dollars  the  recent  levels  of  income  and  cap- 
ital  gains  are  revealed  as  somewhat  more  modest 
relative  to  past  levels.  Real  income,  in  fact,  has 
dropped  below  its  pre-1972  level.  Also  note  that  real 
capital  gains  disappeared  in  1968-70,  demonstrating 
that  if  farm  income  is  relatively  depressed,  farm 
assets  may  not  continue  to  appreciate  faster  than  ,the 
rate  of  inflation. 
Chart  5  With  farm  income  relatively  depressed 
and  with  the  continuation  of  real  capital  gains 
in  some  doubt,  should  there  be  cause  for  con- 
cern  about  further  large  increases  in  farm  debt 
such  as that  which  occurred  last  year?  Many  analysts 
examine  this  question  in terms  of  relationships  shown 
in  Chart  5.  These  analyses  reflect  the  optimism 
derived  from  ( 1)  the  recent  large  absolute  increase 
in  equity  and  (2)  the  low  overall  debt-to-asset  ratio. 
They  note,  for  example,  that  the  farming  sector’s 
debt-to-asset  ratio  is  just  under  16 percent  and  con- 
clude  that  the  sector  can  greatly  increase  its  borrow- 
ings.  The  financial  cushion  implied  by  this  sort  of 
an  analysis,  however,  is  in  part  an  illusion.  For 
instance:  High  equity  in  farm  real  estate  is  no  guar- 
antee  of  sufficient  cash  flows  necessary  to  meet  con- 
sumption  needs  and  to  repay  debt.3  The  debt-to-asset 
ratio  was  not  reduced  significantly  during  the  recent 
years  of  farm  prosperity,  and  thus  the  farming  sector 
has  entered  a  period  of  financial  strain  with  the 
ratio  near  its  post-World  War  II  high.  More  im- 
portantly,  the  average  return  on  farm  production 
assets  is  now  about  3  percent,  while  the  interest 
charge  on  new  farm  loans  averages  around  8.5  per- 
cent.  Given  this  relationship,  further  borrowing  by 
the  farming  sector  would  tend  to  reduce  its  net  in- 
come.  In  other  words,  increased  borrowing  cannot  be 
sustained  for  long  in  the  absence  of  income  adequate 
to  service  the  additional  debt. 
Chart  6  A  look  at  debt  financing  of  capital.  forma- 
tion  provides  another  approach  in  evaluating  ,the rela- 
tive  usefulness  and  safety  of  ongoing  increases  in 
farm  debt.  The  inherent  productivity  of  increased 
3 David  Lins,  “Credit  and  Finance  Outlook”  (Speech 
presented  at  the  1978  Food  and  Agricultural  Outlook 
Conference,  Washington,  November  16,  1977),  p.  8. 
12  ECONOMIC  REVIEW,  MAY/JUNE  1978 debt  financing,  for  example,  can  be assessed  in part  by 
examining  whether  it  is  financing  increased  capital 
formation  or  simply  replacing  internal  financing  of 
this  capital  flow.  Panel  .+  shows  that  increases  in 
debt  have  recently  been  rising  faster  than  capital  for- 
mation.  I3y  1976-77,  debt  financing  had  replaced  in- 
ternal  financing  to  a  highly  unusual  degree.  Debt 
financing,  as  indicated  in  Panel  B,  in  fact,  averaged 
86  percent  of  farm  capital  formation  in  1976  and  95 
percent  in  1977.  In  this  century,  a  comparably  high 
ratio  of  debt  financing  to  farm  capital  formation  has 
previously  occurred  only  once-during  the  ill-fated 
speculative  boom  of  World  War  I.  In  this  latter 
period,  accordin  g  to  Tostlebe,  debt  financing  as  a 
percentage  of  farm  capital  formation  averaged  76 
percent.” 
Chart  7  Farmers  have  relied  increasingly  on  the 
use  of  borrowed  funds  in  recent  years.  Because  the 
importance  of  debt  capital  has  risen  substantially,  the 
growth  in farm  debt  outstanding  has  been  spectacular. 
The  rapid  increases  in  outstanding  farm  debt,  in 
fact,  are  far  outside  the  previous  bounds  of  their 
4 Alvin  S.  Tostlebe,  Capital  in  A&culture:  Its  Forrna- 
tion  and  Financing  since  1870,  A  Study  by  the  Nationa! 
Bureau  of  Economic  Research  (Princeton,  N.  J.:  Prince- 
ton  University  Press,  1957),  p.  136. 
FEDERAL RESERVE BANK  OF  RICHMOND  13 relationship  to  total  net  farm  income  and  to  total 
net  cash  income  from  farm  and  nonfarm  sources. 
(See  Panel  A.) 
There  is growing  concern,  therefore,  as  to  whether 
the  income  of  farm  operators  can  support  this  debt 
load.  Ratios  of  farm  debt  outstanding  to  total  net 
farm  income,  or  to  total  net  cash  income  from  farm 
and  nonfarm  sources,  allow  one  to  measure  the  rela- 
tive  burden  of  debt  against  income.  (See  Panel  B.) 
Both  ratios  indicate  that  the  relative  burden  of  debt 
has  risen  significantly  since  1973.  Farm  debt  (ex- 
cluding  CCC  loans)  in  1977,  for  example,  was  4.07 
times  as  large  as  total  net  farm  income  and  1.56 
Farm Debt Outstanding/Net  Farm Income  3-J  /q] 
*m-e c  _______m  v-e-------. 
Farm Deb 
I 
from  F 
Outstanding/Net &%  Income 
arm and Nonfarm Sources 
times  as great  as total  net  cash  income  from  farm  and 
nonfarm  sources.  Such  increases  indicate  that  farm- 
ers  are  incurring  debt  commitments  at  an  accelerate13 
rate  relative  to  their  income  flows  from  which  debt 
must  be  serviced.  Moreover,  they  make  it  clear  that 
the  farmer  whose  income  comes  solely  from  farming 
generally  has  a  much  higher  relative  burden  of  debt 
than  the  farm  operator  whose  income  derives  from 
both  farm  and  off-farm  sources.  His  capacity  to 
repay  debt  and  his  credit  rating  with  lenders  is  thus 
often  poorer  than  those  of the  farm  operator  who  also 
has  income  from  an  off-farm  job. 
Summary  Some  potential  for  future  financial 
problems  appears  to  be  indicated  by  these  aggregate 
farm  finance  trends.  To  what  extent  problems  ma- 
terialize  remains  to  be  seen,  however.  The  key  ‘un- 
certainty  is  whether  the  level  of  farm  income  in  the 
post-boom  period  will  prove  sufficient  to  maintain 
the  past  appreciation  of  farm  assets  and  to  support 
further  increases  in  farm  debt.  At  current  incI,me 
levels,  the  financial  ratios  examined  here  are  not  very 
encouraging. 
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The farm income and debt situation in perspective

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The farm income and debt situation in perspective

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