Edward Lotterman
U.S. agriculture is on the brink of a financial shakeout that will be the worse since the farm crisis of the 1980s. This is largely ignored, even by many farmers, but the monster won’t stay under the table much longer.
The problem is that farmland prices have risen, in steps, to unsustainable levels just as farm commodity prices are set to fall because of a U.S.-initiated trade war against the rest of the world.
The Russia-Ukraine war’s adjustment from an acute problem to a chronic one also pushed prices down. So has the dramatic growth of corn production in competitor Brazil along with continued growth in that country’s soybean output.
The rise in land prices initially was due to two factors: First, values started going up in 2005 in response to a “global commodity price super-cycle” driven by exports to a booming China. This product price boom continued to about 2012. Second, ultra-low interest rates engineered by the Federal Reserve after the 2008 real estate debacle further boosted cropland prices even as commodity prices ebbed back toward earlier trend levels.
Grain and oilseed prices did retract a bit as China reacted to Trump’s tariffs on its exports after 2017. But the Fed turbocharging money growth in response to COVID flooded the farm economy with readily available land and operating loans at low rates. The first Trump administration also had laid out tens of billions in subsidies to crop producers to compensate them for any losses due to trade skirmishes. Much subsequent research shows these payments “overcompensated” farmers. The payments they got were greater than their losses in the market. That further motivated bidding on land.
Then, on top of all these boom-causing factors, Vladimir Putin unleashed his “special military operation” on Ukraine in February 2022. It soon became the worst European war in 80 years. Both Russia and Ukraine are major crop producers and exporters. Farm shipments from both must cross the Black Sea as must phosphate fertilizer exports from Russia that are vital, for example, for growing crops on the most common soil types in Brazil and elsewhere.
This had multiple impacts all happening at once. Commodity prices had their fastest and highest spike in decades. Field crop farming became frenzied. Rental rates rose. Farmers paid “liquidated damages” to the USDA to revoke Conservation Reserve Program contracts freeing millions in additional crop acres. Sales prices for the small numbers of farms put on sale spiked. Farmers snapped up new combines and tractors that had sat idle on dealer lots five years earlier.
But now, not only is all that drawing to a close, but a financial chasm looms. Interest rates are higher than in 2022. Long-term ones are more likely to rise than fall as bond markets react to ever-increasing U.S. deficits. Rather than being in a trade war with one importing country, we are now at war with the whole world. Our competitive nations now gleefully scramble for our usual customers. And the war in Ukraine shows no sign of ending.
What in economics helps us understand all of this?
Let’s go back to the early 19th century with the fundamental insights of David Ricardo, the most important classical economist after Adam Smith. His thoughts still form the basis of all trade theory and most finance.
Ricardo defined the relationship between the annual net income from an investment asset, the interest rate, and the value of that asset. It’s a simple equation: the annual income divided by the interest rate equals the value of the asset.
Say you get $100 in net rent from an acre of land and the interest rate is 4%, then $100 divided by .04 gives a value of $2,500 for the acre. The same thing is true for a financial asset like a bond you can own in perpetuity, as was common in the early 1800s. The lower the interest rate, the greater the market value from a given annual income. That is the primary reason why land prices rose as the Fed drove interest rates down 15 years ago. But inversely, it also means that if rates now rise, land prices will fall. With the federal budget deficit and thus the national debt set to rise with votes in Congress this week, market forces will force long-term interest rates, like those on farm mortgages, even higher.
A second insight comes from Julius Nyerere, the Tanzanian schoolteacher and president who led his country to independence from the United Kingdom. In the 1950s, he and leftist economists argued that the prices of primary products — grains, metals, fuels and timber — inevitably fell relative to the prices of manufactured products like tractors or computers. This argument was disputed in the 1950s and still is. But it seems to be true for U.S. farm products.
In November 1971, my first harvest after getting out of the Army, we sold corn out of the field to a neighbor at 97 cents a bushel, the price at the local elevator. One can get $4.02 a bushel from the same grain dealer today. Yet adjusted by the Consumer Price Index over the same period, 97 cents in November 1971 would equal $7.48 today. Yes, for a few fevered months in late 2021, the inflation-adjusted corn price had hit $7.50, topping a half century earlier. But if you plot inflation-adjusted corn prices from 1925 to 2025, the trend is clearly downward.
I also remember my cousin enthusiastically telling me the milk price had hit $13 per hundred pounds for the first time. It is $18.42 for Minnesota-Wisconsin this week. But my cousin died in 1986. Adjusted for inflation, $13 forty years ago would be about $41 now, over twice what the current price is.
Of course, productivity has risen both in crops and livestock. An hour of labor produces much more milk or corn than decades ago. But producers should be careful not to respond to short-term price spikes from exogenous shocks like war by locking in the long-term fixed costs of expensive land.
Many are not cautious. That leads to the crunch we see forming.
An excellent farm in Rock County, the southwestern-most in our state, recently sold for $14,000 an acre. The price had been $105 an acre in 1940 and about $750 in 1970. USDA lists the current interest rate on farm mortgages at 5.875%. So the annual interest cost per acre on this farm will be $822.50 per acre. The average corn yield for Rock County has hit 202 bushels per acre. One can contract to sell at a local elevator this November for $3.98 a bushel or $803.96 an acre. So a good crop this year won’t even pay the interest due, much less seed, fertilizer, diesel fuel, labor or other variable costs. See the math? Thus deep problems loom, but need their own explanation.
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St. Paul economist and writer Edward Lotterman can be reached at stpaul@edlotterman.com.
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