The plight of American farmers always makes headlines, even when the facts don’t match the rhetoric. And when Agriculture Secretary Sonny Perdue and the media suggest farmers are about to face a financial crisis, based on hand-picked data, farm interest groups rush to Congress. to ask for more subsidies, in addition to the 20 billion dollars a year. already granted to farmers.
Yes the debate on the 2018 farm bill any guide, farm interest groups today are quite comfortable using similar information on farm bankruptcies to support their case for subsidies. Indeed, groups representing corn, soybeans, wheat, pulses and cotton growers have all complained about insufficient subsidies in recent months. However, a broader look at the data shows that farmers are not facing a crisis and there is no need for taxpayers to give them more subsidies.
As some farm groups and media have pointed out, it is true that the number of farm bankruptcies (as reported in chapter 12 of the bankruptcy code) was slightly higher in 2018 than 10 years ago in 2009. It is also true that the number of farm debt bankruptcies, adjusted for inflation, is at its highest level since the farm financial crisis of the 1980s, Perdue noted in his testimony before the House Agriculture Committee. But these comparisons distort the truth.
In fact, the number of bankruptcies in 2018 was lower than in 2010 and 2011, about the same as in 2012, and only slightly higher than in 2013 and 2014. The five years from 2010 to 2014 were a period of near-record farm income for many farmers. farmers because of near-record prices for corn, cattle, soybeans and wheat. And bankruptcies throughout those five years, as well as in 2017 and 2018, were considerably lower than bankruptcies that occurred during the more genuine agricultural financial crisis of the 1980s.
The number of agricultural businesses has remained relatively stable since the 1980s at close to two million. The Agricultural Census identified 2.24 million farms in operation in 1982, 1.97 million in 1997, and 2.11 million in 2012 (the most recent census year). Thus, a useful estimate of bankruptcies can be determined by tracking the number of farm insolvencies since the mid-1980s.
Between 2009 and 2012, a time widely considered highly profitable for US agriculture, an average of 604 farms filed for Chapter 12 bankruptcy each year. In 2017, when prices for major commodities like corn, soybeans and wheat were significantly lower, only 501 Chapter 12 bankruptcy cases were filed. In 2018, it was 498. All are well below the 5,788 agricultural bankruptcy filings reported in 1987, at the end of the agricultural financial crisis of the 1980s.
In fact, the bankruptcy rate in the U.S. farm economy (the ratio of Chapter 12 bankruptcy filings to the number of farms) was surprisingly low at 0.02% in 2017 and 2018, as is the cases since the early 2000s.
Evidence of the rate at which loans to farmers are not performing, reported by the Federal Reserve Bank of Kansas City, also supports the idea that there is no impending farm crisis.
The rate of non-performing agricultural loans for working capital – loans past due for more than 90 days or not earning interest – is far from mid-1980s levels and below the average rate of the past 30 years. By early 1987, well over 7% of all such loans were problematic. At the end of 2018, the non-performing loan rate was only 1.66%, slightly higher than in 2012 and 2013 (boom years in which farm incomes and prices for many crops and livestock peaked in 40 years).
Similar data is available for housing loans to the agricultural sector. The story there is a little different, but the 1.5% default rate for farm mortgages is what it has averaged over the past 30 years. This is in no way compatible with a “the sky is falling” view of the current financial situation of the agricultural sector.
The debt-to-asset ratio for the entire sector is another useful indicator of the financial conditions faced by agricultural operations. In 1985, at the height of the agricultural financial crisis of the 1980s, the ratio peaked at 22.2%. In 2018, it was 13.5%, much closer to the 11.3% ratio reported for 2012, the lowest debt-to-asset ratio since the USDA began reporting data in 1960.
This does not mean that all is rosy for American farmers. Farmers today are, on average, moderately less affluent than in 2012 and 2013. Farm commodity prices have returned to more normal levels after record highs in 2012 and 2013, and ongoing US trade disputes. United with China, India and other countries that import agricultural products from the United States have hurt crop and livestock prices, as well as farm incomes. Thus, for some farmers and ranchers, the decline in crop and livestock prices generated by these trade disputes could lead them to failure.
Nevertheless, the overall financial situation of the US agricultural sector is sound. Today, bankruptcies are occurring at a negligible rate – in the hundreds – in an industry with more than two million businesses. Over 98% of working capital and mortgages are doing well, compared to 90% for the rest of the US economy. And the industry-wide leverage ratio of less than 14% is also exceptionally low.
There is no evidence of a major agricultural crisis and no reason, on that basis, for lawmakers to give even more subsidies to farmers.
Joseph W. Glauber, former chief economist at the US Department of Agriculture, is a visiting scholar at the American Enterprise Institute (AEI); he is also a senior researcher at the International Food Policy Research Institute. Vincent H. Smith is AEI Visiting Scholar and Professor of Economics at Montana State University.