Are Farmers Next to be Hit by Debt?

Currently the agriculture industry is in a boom cycle. A report by the Federal Reserve Bank of Kansas City, according to CNBC, says the boom may end soon, leaving farmers shouldering massive debt.

Farming is a business that involves constant investment. Investment in land, in equipment, storage, seed, fertilizer, you name it. The money farmers invest in their business comes from one of two places – profits and savings or borrowing based on accumulated wealth (value of land and equipment).

The Federal Reserve Bank report suggests that if farmers choose the latter (collateral-based borrowing), to finance operations, they could end up in debt, risk bankruptcy, and even risk losing their farms.

"The big concern is for 2014 and 2015,” said Nathan Kaufman, economist at the Kansas City Federal Reserve Bank and a co-author of the report.

According to Kaufman, the Department of Agriculture believes there will be a 25 percent drop in farm income in 2014 due to lower commodity prices. If income falls, farmers tend to borrow after exhausting savings and that could create a financial crisis for them.

Farmland prices, which have been explosively high, could also go bust, leaving farmers with even more debt as the amount of land used for collateral would have to be increased to cover the cost of borrowed funds. Farmland, Kaufman says, accounts for 85 percent of a farmer's assets.

There are signs of trouble on the horizon already. Farm equipment manufacturer, Deere & Company DE recently lowered its full-year guidance, reducing growth estimates from six percent to five percent. Deere pointed to erratic weather patterns and economic uncertainty as among the reasons for the downward adjustment.

JP Morgan analyst Ann Duignan told CNBC that her Neutral rating and $91 price target on the stock were a direct result of Deere’s lowered guidance and the fact that farmers have not been able to plant a significant portion of this year’s corn crop yet.

The highest annual farm bankruptcy rate, 23.1 per 10,000 farms, occurred in 1987, according to the USDA and came during a period of increased debt and rising interest rates, Kaufman said.

Younger farmers are more at risk than older ones, Kaufman believes. Said Kaufman, “The older farmers, the ones in their 50's and 60's, remember what happened in the 80's, so they're more conservative when it comes to debt and loans. Younger farmers see today's high farmland prices and tend to be more aggressive when it comes to using the value to get the loans.”

Finally, reduced funding from the government is also affecting farming. Congress is currently debating a five-year agriculture bill and the mood is one of cutting, not increasing.

In early trading, Friday, July Corn was down $2.00 at $6.3950 per bushel and shares of Deere were trading for $87.24, down $2.13 or 2.37 percent. Teucrium Corn ETF CORN was at $39.79, up $0.06.

As of this writing, Jim Probasco had no position in any mentioned securities.