Farmers say they are prepared
for a downturn

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By Dan Gearino | Sunday, May 11, 2008 11:01 PM CDT | () comments

DES MOINES — Iowa’s rural economy is riding high, maybe a little too high.

Land values and commodity prices have climbed to stratospheric levels, a rise so great that farmers and economists are worried that the gains are not sustainable.

“We’ve seen run-ups like this before, and we’ve seen those bubbles burst,” said Chad Hart, an agricultural economist at Iowa State University.

And yet, several factors make the situation unique. First, renewable fuels such as ethanol provide a growing market for farmers, and federal legislation virtually guarantees the market will remain strong. Second, demand for grains in developing countries is growing and expected to continue to rise.

Many Iowa farmers who benefit from the high prices today are survivors of the 1980s farm crisis, when land values fell through the floor and a wave of consolidation rippled through the state. Because of that experience, farmers say they are prepared for a downturn.

“I’ve been farming for over

37 years now, and there’s one thing that a farmer knows, and that’s that nothing stays the same,” said Pam Johnson, who farms near Floyd in North Iowa and is an official with the Iowa Corn Promotion Board.

High prices,

high expenses

Last year, Iowa farmland prices rose 18 percent, according to the Federal Reserve Bank of Chicago. The region overseen by the bank — which also includes Illinois, Indiana, Michigan and Wisconsin — had a 16 percent increase, the greatest in decades.

The changes in land value last year were closely tied to the rise in crop prices. Corn prices doubled over two years to crack the $4-per-bushel barrier. Corn has since risen to more than $6 per bushel.

U.S. Sen. Tom Harkin, D-Iowa, has concerns that land prices have risen too much.

“Farmland in Sac County was selling for over $6,000 an acre,” he said. “I don’t know how you pencil that one out.”

His worry is that farmers are using the high value of their land as collateral to buy more land. If prices drop, farmers could end up owing more than their land is worth, which is a step toward financial ruin.

Although commodity prices are high, the expense side of the ledger has also grown. Farmers are facing much higher prices for fertilizer and gasoline, which has cut into profits.

“I don’t think we can sustain these costs for a long period of time,” said Brian Ehlers, who farms near Walcott.

Younger farmers are in a particularly difficult position. The high prices for land rental have made it difficult for new farmers to get started. A rapid drop in land prices would make land more affordable, but the resulting instability would not be hospitable to newcomers.

“Who will be unable to farm in the future?” asked Iowa Sen. David Johnson, R-Ocheyedan, a dairy farmer.

He hopes prices will level off, rather than drop.

Harkin also hopes for a smooth ride. That can happen, he said, if there is a continued expansion of markets, such as the market for high-protein foods in developing countries.

He also is optimistic that renewable fuels will continue to be a major market for farmers. The federal renewable fuel standard requires fuel refiners to increase their use of fuel from renewable sources, with an ultimate goal of 36 billion gallons by 2022.

“I’m hopeful … that any price falloff for our commodities will be small and cyclical in nature, not a drastic drop,” Harkin said.

David Miller, an economist with the Iowa Farm Bureau, doesn’t expect a rapid shift. He said land prices, while high, are not yet as high as they would be if they reflected current crop values.

“I don’t see a crash coming in land values because I don’t think we’re done going up,” Miller said.

He thinks the important distinction is between farmers who own their land and those who rent. Renters, he said, are making a big bet that commodity prices will stay high enough to justify heightened rents. He estimates that roughly two-thirds of Iowa farmland is rented.

Farmers ready for changes

Iowa Secretary of Agriculture Bill Northey, a Republican, thinks the possible harm of a downturn will be tempered by farmers’ expectation that prices will drop. He said there is a big difference between enjoying a temporary windfall and expecting that price to last forever.

“This has happened so quickly and so dramatically that it is hard for farmers to figure out what the right price is,” he said.

Northey is one of many Iowa political leaders who farmed during the 1980s downturn. He started on his Spirit Lake farm in 1981, which gave him a rough introduction to the business.

This, as much as anything else, is why he thinks farmers are ready for whatever is coming.

“I think if you were involved then, you are more cautious,” he said.

Dan Gearino can be contacted at 515-243-0138 and dan.gearino@lee.net.