Friday, December 16, 2011

A Child of the Farm Crisis

I was a child of the farm crisis that struck the Midwest in the early 80's and probably the largest reason why I am now an engineer and my brother a wildlife biologist. We grew up through a terrible time when our parents struggled to survive and most of our neighbors didn't. Our family survived because we were a small farm operation with little debt, survived off the land by raising a lot of our own food and had outside income in the form of my mom working as a computer programmer in the town I currently reside. The ironic thing about being one of the sole survivors because we were small was that the family farm got a lot larger as those who didn't survive sold off and moved away.

Researching into the many families that used to live in and around section 7 (a section being 640 acres) which is now almost wholly owned by my parents has caused me a lot of time to think about the crisis and its effects. I suspect that some of my readers might not be as familiar with it as I am having lived through it first hand, so I am going to spend a little time and summarize those events that shaped my life so much.

In the 1970's, prices of American grain soared due to record purchases by the Soviet Union and generally lowered trade barriers. American farming incomes soared. Increased incomes and low interest rates drove farmland prices to records highs. Farmers bought land, assumed mountains of debt that were no problem for paying off due to the high commodity prices that they garnered from selling the grain from the newly purchased land. Then the 1980's arrived.

The Soviet Union invaded Afghanistan and President Jimmy Carter set up a trade embargo to punish them and essentially stopped those record grain purchases. Even when the embargo ended, the Soviet Union had learned its lesson and future grain purchases were diversified through many other countries. Corn piled up, prices plummeted, money tightened, farmland values plunged and suddenly millions of farmers couldn't pay their debts. Those small farmers such as my parents who didn't have mountains of debt and outside income were able to eek by. Those huge farmers which didn't exist in that part of Iowa at the time could also survive just due to their large cash stockpile. But the middle sized farmers, those that had been using their new found wealth to expand, were decimated.

Those that survived, gradually absorbed the remnants of the farms that were vacated. Much of my childhood was spent salvaging lumber from old farmsteads on farms that my parents purchased for use elsewhere. Of the six farmhouses that used to stand on section 7, only my parents farmhouse remains. all the other surrounding sections suffered similar losses. It is something that sticks in a young man's brain and surely subconsciously affected many of my career related decisions as the time came to make them.

Perhaps the scary thing is that history appears to be repeating itself. Increased demand for corn to be turned into ethanol mandated by the government has driven up corn prices to records highs. Low interest rates and farmers flush with cash have caused land prices to soar to record highs. Recently some land here in Iowa sold for a record of $20,000 per acre or nearly $1.5 million for a 74 acre tract. Farmers trying to expand are incurring mountains of debt that probably can be reasonably paid off if prices stay the same. But what will happen if they don't?

I suspect my parents will survive another farm crisis should one occur because even though their farm is nearly 10 times the size it was in the 80's, it is paid for with no debt owed and still it is considered small to farm sizes in the north central part of the state. Land it not as valuable down here though it is still garnering record prices in the $5000 to $6000 per acre range. Although they have given up their source of outside income, they still raise a lot of their own food so combined with no debt, their expenses are minimal. Their survival lessons from the 80's through today remain in me as I refrain from debt, live beneath my means and was able to weather this passing economic storm that we have been through these last few years. Living through the farm crisis both scarred me and prepared me for life. I still am a child of the farm crisis.


Ron said...

Very interesting post, I enjoyed reading.

I also grew up seeing the effects of over-expansion and subsequent loss, maybe why I tend to be frugal and avoid the future uncertainty of debt.

R. Sherman said...

Nice perspective. I dated a woman at the time from north Missouri whose parents farmed. Like yours, they were very thrifty and didn't borrow lots of money. Her father would only shake his head when he heard about neighbors leveraging hundreds of thousands of dollars of land value saying, "someday, it's all gonna crumble."

Of course, it did.

Of course, it's the government diddling which causes the bubble to inflate. One wonders how many today remember those years in the past.

BTW, one other problem was the unbelievably high estate tax rates at the time. If a land-rich, debt free farmer passed on, his kids would have to come up with 40-50% of the total FMV of the estate to pay the Feds. It wasn't until the new tax code in 1986, when the estate taxes became (marginally) more manageable.

Ed said...

Ron - Thanks Ron.

Ed said...

R. Sherman - Government diddling. A very succinct explanation of the cause of so many problems these days.

Vince said...

What's the return on the acre.

CAP is being renegotiated and the farmers here are expecting a bonanza when quota's are removed. They don't seem to realise that millions of acres will yet again become economic in the USA. At the moment land price is €10,000 down from €20,000 three years ago for agri land.
When in gods name would you see a return on $20,000 an acre unless you're turning the place into a golf course

Ed said...

Vince - It is hard to identify the return since it is so dependent on so many variables but in say 2010, you could cash rent land for $200 per acre (assuming that figure is based off current prices and average yields). So for the guy who paid $20,000 per acre, he is looking at a 100 year payoff. For our area with land closer to around $5500/acre the payoff is still 27.5 years.

Vince said...

This year land for tillage went for between €100-160, with the odd parcel going for €250 where there was a battle. Grass, slightly more, another 10ish.
They have high prices at the moment AND they are insisting on holding the credits. These idiots think they will comp with your family and bigger who have econ of scale.
These numbers make no sense.

Michelle Goodrum said...

Interesting post. I remember that time period but you've provided a unique perspective as someone who lived through it with the farmer's perspective.

R Johnson said...

One of my family friends at that time got a plan off the internet (newish at that time)got busy on his tractor and turned eighty percent of his farm into a nine hole golf course, developed the rest of his land residential and sold it as golf view housing and came out smelling like a rose. Now he (actually his heirs) has sold the golf course and the whole property is being developed as residential.

Ed said...

Michelle - It seems like yesterday and yet it was 30 years ago!

3 Score - Sometimes you just happen to be in the right place at the right time. Unfortunately, that hasn't happened to me too much in my life.

warren said...

This is cool info about a not-so-cool situation. I often wonder what will come in the near future with so many things up in the air...I think the lesson on how to survive is simple and clear from what your parents did...