Heartland Heartburn for U.S. Farmers

Edward J. Dodson

[Reprinted from Land & Liberty, July-August, 1987]

STAGFLATION (high inflation accompanied by high unemployment in the 1970's demonstrated to economists that politics does indeed dictate economics. OPEC had spoken and the West shuddered. Keynesian demand management fiscal measures proved impotent against the tight control exerted over a vital natural resource. Since October 1985 we have observed with equal awe the erosion of OPEC's grip on the market; a combination of conservation and increased Western production and a partial global recession tipped the scale against the suppliers and forced competition onto the cartel players. Some, like Mexico, have suffered more severely then others.

Back in the mid-1970's while the West was sliding into deep recession, the international banks were flooded with deposits from the oil-exporters. Inflation and government borrowing pushed interest rates so high that business (just trying to stay in the black) was cutting back, and the Saudis and other recipients of all that revenue just could not spend it fast enough on domestic consumption and the development of infrastructure. The global economy was handed a "hot potato" that it attempted to pass around. In the end, it was the less developed countries (LDC's) that were caught holding the debt.

To compensate for the greater risk of lending to poor countries, the banks charged very high rates of interest. The LDC's were all anxious to industrialize end bring themselves into the modern world. They tried to do so without a solid foundation on which to build industry and at a time when world demand for almost all goods and services (military hardware excepted) was depressed.

The bankers closed their eyes to much of the evidence that disaster was inevitable; they counted on even greater inflation in commodity prices to enable the LDC's to secure the foreign exchange necessary to repay the debt. Instead, the recession deepened in 1979, the bottom fell out of the demand for raw materials and the LDC's failed miserably to compete with more seasoned industrial societies. One by one the LDC's threatened default and had their loans restructured. The day of reckoning for the international financial community seems to be close at hand.

For American farmers a tidal wave of disaster appeared on the horizon. Experts from the International Monetary Fund and the creditor banks demanded that the LDC's cut domestic spending, increase taxes on business and individual income and export, export, export out from under the weight of debt. The result was to flood the American market (the least protected from "cheap" imports) with raw materials, commodities and finished goods of every sort - including agricultural products.

High grain prices in the mid-1970's -- stimulated by sales to the Soviet union and crop failures in South America - induced many farmers to borrow heavily to buy new acreage. By 1981, however, the global recession reached the American heartland. A downward spiral in raw materials and farm product prices stimulated economic recovery in the Eastern states where high technology and the service sector dominated employment while the same dynamics caused agricultural products to meet stiff price competition from imports.

Farmland values began to drop 10-15% annually and unemployment rose. Bankruptcies and foreclosures in rural America appeared almost immediately and continued at levels not experienced since the 1930's. Economists at the Federal Reserve Bank reported in mid-1986 that of the 650,000 commercial-size U.S. farms, more that 8% had debt ratios In excess of 70% and were experiencing negative cash flows. Structural weaknesses in the American agricultural system were becoming evIdent. As one economist summarised the situation:

The U.S. government kept in business an agricultural Sector that was overcapitallzed and overpopulated for years. We're becoming a Service economy, and the world Is drying out from the speculative resources boom.

The collective debt of American farmers is estimated to be over $200 bn, or roughly the amount owed by Mexico and Brazil combined. On the other hand, farmers who resisted the temptation to borrow heavily have seen fuel, fertilizer and land-lease costs drop considerably; some of the more stable farmers are taking advantage of their neighbor's troubles to add new acreage at rock bottom prices.

The consensus now is that the weakest fanners are gone and thcse who have survived will come out of the crisis healthy and competitive. Nevertheless, at least $25 billion of the debt is deemed by agricultural bankers and economists to be uncollectible. Continued foreclosures will add a good deal of unmarketable farmland to the portfolios of the federal government, banks, insurance companies arid other Institutional lenders. Unable to sell off the land except at large losses, these new farmland owners are renting it out to the survivors. One economist estimates that by 1995 between 70-80% of all American farmers will either be renting land only or be employed as farm managers working for corporate owners.

What has been the net impact thus far? One out of every 20 farmers went out of business In 1986. Over 2,600 agricultural businesses also failed. Farmland values dropped in average value from $823 per acre in 1982 to $596 at the beginning of 1986. In the process a large amount of farmland has changed hands. Roughly 60% of farmland sales during 1986 were from younger to older farmers; the remainder brought investors -- doctors, lawyers, and syndicators -- into the farmland market.

Farmland ownership is becoming increasingly concentrated in the hands of absentee owners. America is losing the traditional family-owned farm. In addition, the Farm Credit system and the Farmers Home Administration together now control over 6m acres (a landmass equal in size to the state of Vermont). The average farm size today is twice that in 1950, and fewer farms mean fewer farm communities, greater rural Isolation.

Regardless of who owns the land, there will be no real solution to this problem until the structural flaws in our system of land tenure are removed. Americans can do very little about the political system in the LDC's and elsewhere, but we must rid our agricultural sector of the boom and bust pressures created by inflated land values. However, we should not mistake effect for cause. Speculation is the result of a tax system that encourages the hoarding of land; it drives the price up for those farmers who would use it to its greatest productivity. Politics continues to dictate economies; and, as always, the wrong politics results in economic disaster.