Farm Economy Revives as Subsidies Set Record : Debts Being Paid Off, Income Reaches New High, but Economists Warn Problems Could Return

Unprecedented federal farm subsidies and increased foreign demand for U.S. grain have, for the present at least, triggered a recovery in the nation’s farm economy after more than five years of economic distress and depression.

But economists warn that some farmers who survived the 1980s could still be jeopardized in the 1990s by excess production capacity and planned reductions in government subsidies.

Perhaps in anticipation of possible hard times ahead or perhaps because there has been a fundamental philosophical change, farmers are paying off debts at a record pace.

Paying Cash for Land

Farmers are also reducing their borrowing and paying cash for land rather than financing their purchases. Unmanageable debts were generally cited for the wave of foreclosures and bankruptcies that washed across rural America in the mid-1980s. Economists point to new attitudes about debt and borrowing patterns as one of the most dramatic changes to result from the prolonged farm crisis.

“Things are improving at an unbelievably rapid pace,” said Leo V. Mayer, the Agriculture Department’s deputy assistant secretary of economics. “We have reached the bottom . . . . No one could have conceived, 18 months ago, that things would get this well this fast.”

“Agriculture is in the midst of an honest-to-goodness recovery,” declared Mark Drabenstott, assistant vice president and economist for the Kansas City Federal Reserve Bank. “Farm income is a record high, farmland values have turned around and moved up much more broadly than people expected, farm loan problems are down and bank profits are up.”

Bringing an end to the painful economic turmoil that resulted in farms being lost and rural main street businesses being closed in the mid-1980s did not come cheaply.

In the past two years the federal government has pumped $50 billion directly into the nation’s farm economy under provisions of the 1985 farm bill, the most expensive piece of farm legislation in the nation’s history. Government economists estimate that this year another $18 billion will be spent, although the legislation requires gradual reduction of federal farm aid over the next three years.

Last year fully 40% of the nation’s record $57 billion in net farm income “came from government payments,” said Drabenstott. “Clearly an important part of the farm recovery is being underwritten by Washington.”

‘Transfer of Wealth’

“We’ve got a massive transfer of wealth from the non-farm population to the farm population,” said Agriculture Secretary Richard E. Lyng. “If we hadn’t had the 1985 farm bill, I think we would have had a much deeper catastrophe on the farm.”

Farmers received guaranteed prices for their grain. They were paid for leaving part of their land fallow for the year and paid for agreeing to leave other land idle for at least 10 years. Farmers also benefited from government subsidies and a weaker dollar, making American agricultural exports cheaper on world markets.

Increased exports, coupled with government sponsored production cutbacks, are stimulating grain and soybean prices. Farmers have also been helped by some of the strongest livestock prices in years.

With incomes “strong across nearly all segments of agriculture, (farmers) were able to restructure their financial situation quite aggressively,” said Drabenstott. “It was the greatest (debt) restructuring in agricultural history.”

Bad Debt Reduced

” . . . We had a record-setting reduction in farm debt nationally,” said Iowa State University economist Neil Harl. “My estimate is that we have worked through between 70% and 75% of our bad debt . . . . It looks (like) about 60% of that reduction was paid off voluntarily and only about 40% was paid off by involuntary means like foreclosure and bankruptcy.”

Harl estimates that nationally there was a $30-billion reduction in farm debt last year alone. “We’ve never had a year even approaching that.”

“Farmers are paying off old debt at a dramatic rate,” said Agriculture Department economist Mayer, citing a $50-billion drop in outstanding debt since 1984. “That means farmers are not only paying off old debt, they are not borrowing new debt . . . . Farmers just aren’t spending.”

“One hears around the countryside that a lot of the farmland that is being purchased is being bought for cash,” said Drabenstott.

But the rural recovery is not yet spreading to the main streets of rural communities, economists say. One exception is in the farm machinery sector of the economy, where sales are beginning to improve. However, farmers are discovering that they now must wait up to several months for delivery of new equipment because manufacturers are building equipment only on order, seeking to avoid again being caught with the expensive inventories that forced many farm equipment companies to fail in recent years.

Economists Wary

Economists think that the current recovery may be only temporary.

“I think it is entirely possible that as we look out over the next three, four or five years we could be in a circumstance in which we see some phasedown in (federal) farm programs while our export markets persist sluggish,” said Drabenstott.

“The adjustment in the structure of agriculture isn’t over,” Mayer said.

“We’re going to still see shakeout,” Harl warned.

“I urge farmers to be a little bit cautious,” Agriculture Secretary Lyng said. “Optimism is OK, but don’t go crazy. Don’t get out there and borrow too much again.”