Inconvenient Truths About Farming

This Week In Ag #104

Here’s an inconvenient truth about farming: many farmers live off their equity. When land is your biggest asset and land prices remain strong, so does your balance sheet. This offers lending power. Depending on your situation, it’s very possible to break even, or even lose money in your farming operation during a year, and see your net worth grow. Rising land prices provide a blanket of equity. Provided, of course, they increase or remain stable. What drove the 1980’s farm crisis was that land prices declined by 60% as debt more than doubled. That ushered mass foreclosures and prompted a government bailout of the Farm Credit system.

Fortunately, today’s farmland prices, albeit stabilizing in many areas, remain healthy. So are equipment fleets. It’s not uncommon to see tractors from the 1990s command prices well above what they sold for new. Of course, living off equity is not a trend many farmers want to endure any longer than they must, especially younger farmers. Before the 2025 cropping season begins, many farmers are carrying over operating debt from 2024. In the recent Purdue Ag Economy Barometer, 23% of farmers who expect their loan size to increase said it was because they were carrying over unpaid operating debt from the prior year, up from 17% last year and just 5% two years ago. Clearly, two years of declining farm income is taking its toll. Let’s hope the 30% rise in farm income that USDA is projecting this year helps.

Another inconvenient truth of farming is that over half of all US cropland is not owned by the ones farming it. It’s rented. Most often with short-term cash rent leases. Cash rent means just that: the farmer pays a set amount of money annually to a landowner to farm their land. The farmer assumes all the risk. He/she provides all the labor, machinery and production costs (an exemption may be lime, which can be shared). They retain all the harvested crop (or livestock in the case of pastureland) and market that crop. The landowner pays property taxes, liability insurance and makes land improvements such as tiling or terracing. Those who own the land they farm (often inherited) are clearly in a much better financial position than those who rely on rented acres. Just look at the breakeven numbers. According to the University of Illinois, projected 2025 breakeven costs for corn on cash rented ground is $4.60 per bushel vs. $3.17 on owned land. When you consider that current bids for new crop corn are $4.48 along the Illinois River, the difference becomes even more revealing. Paying high cash rents can be a formula for debt accumulation. It’s what gets many farmers in trouble. The rub is that land is highly competitive in many areas. Take Illinois. The numbers above are based on $339 cash rent in central Illinois. However, I know of cash rents going for much more. Also, once you turn down a farm, it’s nearly impossible to get it back.

Last week TWIA expressed a bullish outlook on corn. A few days ago, no less a source than CoBank (one of the nation’s leading ag lenders) agreed. The Farm Credit institution’s outlook revealed a projected 4.2% increase in corn acres, at 94.5 million acres. Sure, world corn stocks are really tight and exports are strong. And ethanol exports are at record levels. However, corn’s competitors don’t look all that strong. Its chief competitor, soybeans, is expected to fall over 3% to 86 million acres. The National Cotton Council projects a 14% drop in cotton acreage. Sorghum and spring wheat acres expect significant reductions. Hay prices keep dropping. Of course, we are still over a month away before most planters start dropping. And as we’ve just seen, a lot can change in 4-6 weeks. But never underestimate how much farmers love to grow corn.