It seems to me a historical fact that farmers (as a class) always wind upin hock to the banks. Why is this?Farmers are probably the most vital members of the economy-afterall-they feed us! Yet, despie their hard work, they never seem to generate enough surplus to pull themselves out of dependence upn credit. Why is this so?The 19th century American economist (Henry George) pondered this, and proposed a singleunitary tax on land to remedy this. What I can’rt understand: suppose you are a farmer on the Westrn frontier (ca 1880) you get your land for free (Homestead Act), and you start farming. You have a market for your produce (the Eastern/Midwest cities are growing like gangbusters, due toimmigration from Europe). Yet, you bust your ass, and fail (more than 80% of the small farmers of this era were foreclosed). So why do farmers seem to always come out on the bottom? Farming remains a precarious business (for the small guy). Most Mid-Western farmers wind up working for less than minimum wages! I recall seeing that NPT documentary ("THE FARMER’S WIFE"0-truly heartbreaking!
I don’t know if that’s actually true, but here’s my theory why it might be:
- Farming is a comodity business. Grain is grain. Corn is corn. That means low profit margins.
- Many farms are heavily leveraged. All it takes is a bad crop and the farmer can’t make bank payments.
- There are economies of scale that make large farms more cost effective than small ones.
Not in any way to be a smarty-pants, but sometimes it pays to state the obvious.
First off of course farmers get into debt to the banks. Who else would they get in debt to? I wonder how banks feel lending money to farmers and then end up owning a silo and three thousand acres?
Next off, I would guess that eighty percent of almost any sort of business goes bust. For some reason farmers who go belly up get more attention then say tailors or cobblers.
Finally I will note that the (American) federal system of government give farmers more political representation than they ‘should’ have based upon their numbers. As a result there are many well-meaning government programs that encourage farmers to (as Earl Butz said) ‘Get big or die.’
As a result, I guess, farmers are encouraged to go into debt and so bankrupt in a rather big way.
Well part of it may be because they sell their crops before the crops are grown. The farmer has money up front, but it must last till he can sell his crop for next year. When you have a big pile of money upfront it’s easy to overspend.
It’s also easy to wind up owing crops that no longer exist because they were eaten by locust.
Grew up on a farm, but not an expert in economics.
I think msmith is largely on target. Margins are very tight, capital requirements are large, and the large variations in output due to weather or what have you mean that a couple bad years can easily tip a farm to marginally profitable to bankrupt.
I’ll make a couple more points, though. It’s worth noting that there is near perfect competition (in the economic sense) between farmers, but that there is a rather low level of competition between suppliers of farm inputs and buyers of farm products. Most farm machinery is produced by just two or three giant conglomerates. Most grain is bought by either ADM or Cargill. Chicken processing is a near-monopoly. The list goes on. When you’ve got differing amounts of competition on two sides of an economic exchange like this, the prices are inevitably going to tilt in favour of the side with less competition. This is why ADM and Monsanto are keen supporters of ag subsidies - the more money farmers have, the more Monsanto can sell Roundup for, and the less ADM has to pay for corn. This is also incidentally why ag subsidies can be dropped without hurting farmers (aside from short-term transition pain), because the subsidies largely end up in the profit margins of the people who buy and sell to farmers. For a cite, look up what happened in NZ when they eliminated ag subsidies, or what’s happened here in Canada when ag subsidies were slashed to a fraction of their former size. Or look at the recent history of live beef prices in Canada vs. the price in the grocery store - the two have bugger all to do with each other.
There are two (or three) ways that farmers can do something about the tight margins. The more common is economies of scale, as mentioned. The bigger you are, the more money the small profit margin per unit of production amounts to. But of course, the bigger you are, the more capital you need, and the more you’re going to be in hock to the bank for operating loans and the like. Course, if you’re big enough, the bank won’t be eager to foreclose on you, either, because your total debt may well be in the millions, and they’d rather float you along past a few bad years than write off the loan and have to deal with doing something with the land that was certainly the security for the loan. So there are a couple of advantages in being really big.
Smaller operations, on the other hand, can aim a niche markets. Organically produced food, specialty crops or livestock, or even just farmgate sales directly to consumers which are greatly advantageous to both the farmer and the consumer since there are 2-3 middlemen being cut out of the picture. The little guys may not be able to compete on economies of scale, but they’re generally more flexible, and so can exploit smaller opportunities. But of course, there’s only so many people who can exploit a niche market before it’s no more profitable than mainstream products.
The final way low farm profit margins are dealt with is off-farm income. Over half of farmers’ income in Canada now comes from off-farm sources (usually jobs, but often self-employment in other fields as well), and I believe over 90% of Canadian famers rely on off-farm income to at least some extent. Statscan publishes this sort of data, so cites are available if needed.
You left out the high capital costs. Farmers must pay for farm machinery, often seeds, fertilizers, pesticides and herbicides, etc., etc.
Essentially, you’ve got a commodity business that has high costs, razor thin margins and uncertain revenues. It’s almost like the restaurant industry, just an inherently precarious business to be in unless you have economies of scale on your side.
Through federal handouts, farmers are encouraged to produce more than the market can bear. This drives down prices. This leads to more federal handouts. This sends prices down further. Repeat.
Prices on agricultural goods simply don’t rise as fast as inflation (unless there are government price supports), so any farmer with a long term loan ends up paying a greater and greater percentage of their income to cover the loan as time goes on.
One reason is that we traditionally think of farming as a “way of life,” not just a job. Thomas Jefferson’s vision was of a nation of small yeoman farmers, all free and independent and beholden to no one because they would own their own means of production (land). (He did not foresee how technology would change the economics of farming.) The same idea has popped up again and again throughout American history, sometimes expressing itself in political movements like the Populist Party or intellecual movements like the Southern Agrarians (and, to some extent, the hippie counterculture).
It can be argued that a certain level of subsidization is justifyable for industries like farming or even aerospace that have national security considerations.
Inflation and interest rates are not the same thing.
Also look at a series of books by Gene Logsdon. The Contrary farmer. In one of them he compares modern farm families trying to stay in farming vs Amish farmers who he claims are making profits and doing very well.
The Amish stay small, have low machine costs, practice traditional farming with out buying lots of fertilizers and pesticides vs the bigger, mechanized trend of modern farming.
He quotes one modern farmer, something like yea I get 200 bushels of corn an acre and it sells for 2.50 a bushel, but it costs me $3 dollars/acre to plant, grow, and harvest, the more I plant, the deeper in debt I go.
Is farming the only industry in which the producer has no say in how much his product is sold for? I think that has something to do with it.
True. But that does not invalidate ITR Champ’s comment. You’ll wanna take a close look at “price parity,” formulas. Price parity is essentially a price support enacted in 1933 to guarantee price levels for certain commodities for farmers. It was actually not a bad idea, but it has been implemented in an idiotic manner. Price parity was meant to guarantee that an adequate supply of certain farm commodities would be produced by assuring both a market (the government buys what’s not sold otherwise) and a profit margin. The asininity of it is that the formulas used were based on a couple years when both production volumes and market prices were peaking - in the early 1910’s. It is on the upper range of possible farm income levels that the parity price formulas still in effect today were calulated.
Why are farmers “always” in debt? It really depends on what era you’re talking about.
There are two periods in 20th century when concerns about farm bankruptcies have been great; a new one may be looming.
The first is from about 1920 thru the Great Depression. The overall U.S. economy has been considered generally prosperous for 1900 thru 1920, with the agricultural sector performing quite well, too. In fact, the years 1910 to 1914 are often called the “Golden Years of Americam Agriculture.” It is these years that the “parity price” formulas of the various omnibus federal farm acts have been developed from. (See my previous post for a definition of parity pricing).
After about 1920, commodity prices began to fall, mainly due to over-production. Lower incomes left many farmers, who had borrowed during the previous decades to finance land & equipment purchases for expansions, unable to repay loans. Massive defaults on these loans further caused many banks in rural areas to fail. This problem was then exacerbated by general economic collapse in 1929 and the “Dustbowl” of the thirties. The fallout of all of this was a huge decline in the value of farmland - the very asset farmers rely on most to obtain operating loans. It wasn’t’ until about 1950 that the value of an acre of farmland again reached its post WWI high of $69. “Synergistic Death Spiral” is as good a term as any to describe all this.
The second era of great concern about farm failures is obviously the 1980’s.
Again, as before, the economic climate of the immediately preceeding period encouraged farmers wanting to take advantage of export opportunities, relatively high commodity prices and high farmland values to expand their operations - and expansion means debt; lots of farm lending in the 1970’s. The combination of a high inflation rate and low interest rates made borrowing doubly attractive.
Then, in the 80’s, while many farmers were leveraged quite highly, the economic trends of the 70’s reversed themselves. Export markets contracted; raw material costs increased, commodity prices fell; land values (which again were used to secure loand) dropped precipitously. Monetary policies intended to reduce inflation caused large jumps in interest rates. These interest rates, as before, made it more expensive to borrow money for operational expenses.
This main differences between these two crisis are that while the first one had some external weather contributors, the second was caused almost wholly by government policies. Addtionally, the vast majority of farm debt was held by private creditors in the first period, but more was held/guaranteed by government programs in the second. Government guaranteed loans have historically provided less incentive for farmers to be financially responsible and keep marginal operators in business longer than would normally be the case. In turn, this means that the final failure of an operator may be more costly than someone forced out of business earlier.
Today, were you aware that “family farmers,” since the crisis of the mid-eighties, have been eligible for a special bankruptcy program which other enterpreneurs are not? Chapter 12 gives farmers in financial straits considerable power to dictate concessions from lenders by enabling them to file a reorganization plan directly with the courts. Creditors are not permitted to review these Chapter 12 plans. Previously, farmers generally filed bankruptcy under Chapter 11 where creditors have the right to block the debtor’s plan and force liquidation of assets.
The Chapter 12 bankrupty has had the effect of keeping marginal farms operating - and borrowing money - longer than might normally be the case. Additionally, it discourages farm operators from becoming more efficient by making it more attractive for them to simply reorganize and charge off debt; which in turn encourages more borrowing.
This special bankruptcy opportunity, coupled with the ever-increasing trend of public held/guaranteed loans, along with simply more loan programs and price supports (which is essentially what “price parity” is) for farmers may be leading down the road towards another farm crisis.
So, why are farmers “always” in debt? Really one reason - because they borrow a lot of money - which has many root causes, none of which are simple. Frighteningly tho’, as the government has become more involved, farmers have found a greater incentive to borrow more heavily.
Generally:
http://www.ers.usda.gov/Topics/View.asp?T=101800
And you may be specifically interested in these two linksa about farm income and bankruptcy:
http://www.ers.usda.gov/publications/AER812/
http://www.ers.usda.gov/publications/aib788/
What are you trying to say? That government forces farmers to sell their products at some price below what value they might have on the open market?
It’s not the only one, but it is quite literally a commodity business. Unlike cars and clothes and DVD players where companies can charge a premium through “branding”, all grain and wheat is pretty much identical. That gives farmers little or no influence over prices.
In the case of the Canadian Wheat Board, that is exactly the case. Whether the CWB’s merits offset this is a matter of huge debate.
We’re asking for one hell of a course in economics here. And while I am not an economist…
The prices paid for commodity crops hasn’t changed that much in 75 years.
The prices for inputs has increased.
Farmers must become more productive to make a profit.
Unfortunately, competition means all the other farmers will also become more productive.
Therefore, farmers must hope that they grow more crops than the other farmers. This means either
a) having a bumper crop, which more often than not depends on good weather, or
b) getting bigger, so you can optimize the cost of machinery and buy inputs in volume.
If you want to get bigger, sooner or later you’re going to have to borrow money.
And all it takes is one year with bad weather/disease/insects to put you behind permanently.
This is an odd statement, since outside of a few special cases like the aforementioned Canadian Wheat Board (and even there, you can sell your wheat off-Board, just not for export), farmers do have a say in how much their products are sold for. Don’t like the price of barley in November? Let it sit in the bin till March, see if things get better. Expect the price of feed oats to drop because hog prices are down? Move the oats now instead of waiting. It’s a bit tougher for some, such as hog feeders, since you can’t hang onto market weight hogs as they become worthless if they get too big, but even there there’s wiggle room.
I’m going to post a link to a study I found rather interesting. It’s from the National Farmers Union, which is not at all an unbiased source, and as I recall from when I read it a year ago it overstates its case in several places, but I think it contains some pretty good insight into the question posed by the OP, and some of the statistics it contains are a bit surprising.
The Farm Crisis, Bigger Farms, and the Myths of “Competition” and “Efficiency” (33 page pdf)