Minnesota’s farmers struggle with depressed prices and steep losses

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MinnPost photo by Sharon Schmickle

Scott Schley from Dodge Center is considering quitting the family swine business.

See below for audio slideshow.

Much of Minnesota escaped the full force of the recession’s damage last year by standing on agriculture’s broad shoulders.

Now it’s time to flex your own shoulder muscles, town folk. Farmers need the favor returned.

Unlike last year, when many farmers prospered, their incomes now are falling even as the overall economy picks up.

Depressed prices are forcing livestock farmers to sell milk and animals at steep losses — driving hundreds of them out of business. Crop farmers are faring better, but grain prices are down from last year’s highs. And an early killing frost could clip crop returns.

“People came to the State Fair, and they saw everything looking nice, farmers with nice animals and so on, but they didn’t see reality,” said Scott Schley, a hog farmer from Dodge Center. “The reality is we have to go back home and face debts and all of our other problems. It’s tough.”

A contraction in the second-largest sector of Minnesota’s economy is exactly the opposite of what the state needs right now. 

Minnesota faces a budget deficit as high as $7.2 billion for the biennium that begins less than two years from now. That’s a whopping 19 percent of the state’s overall budget. Gov. Tim Pawlenty and some other politicians have expressed hope that rising revenues could narrow the gap as the state recovers from the recession.

In the face of that hope, MinnPost is examining Minnesota’s economy, region by region and sector by sector. You can find the kickoff for the series here. This installment weighs prospects for agriculture.

Instead of picking up, though, portions of the farm economy are in such dire straits that analysts worry the state could head toward a repeat of the crisis of the 1980s when some 20,000 Minnesota farmers were forced off the land, main street businesses folded in droves and 49 ag banks failed across the Upper Midwest.

More troubled loans, less income
“We are seeing a dramatic increase in numbers,” said Mary Preisler, director of Minnesota’s Farmer-Lender Mediation program.

Minnesota law requires that creditors with $5,000 or more in secured debt against a farm offer mediation before proceeding with foreclosure and other collection procedures.

Nearly 2,800 farmers across the state have received notice this year that creditors are moving to collect such debts, making them eligible for the mediation — and also placing them at risk of losing property, Preisler said.

“What has happened is that they are not able to pay a major creditor,” she said. “If they fail to come up with a plan, the next step is foreclosure or bankruptcy where that is appropriate.”

Many other farmers, though, are better positioned to face hard times because they built equity and bolstered their financial positions during last year’s boom, said Tobias Madden, regional economist for the Federal Reserve Bank in Minneapolis.

“They may need that [reserve] now,” Madden said. “The outlook for the next quarter is for decreased farm income and capital spending and household spending.”

Forty percent of Minnesota bankers surveyed by the Fed said net farm income was down through the first half of this year. And nearly half the bankers predicted it will fall further.

The repercussions already are pummeling farm towns. More than one-third of the bankers said farm families have cut household spending and investments in capital improvements. One in five said loan repayments are falling too.

While ever fewer of us make our livings on farms — only about 3 percent of Minnesotans are active farmers — the sector still figures very large in the state’s economy.

The state’s 79,000 farmers generate about $9.3 billion a year in income that is spread through their home towns and regional centers. Factor in the full sweep of the businesses that supply their needs, process their outputs and deliver their goods, and the tally rises to $55 billion worth of economic activity supporting more than 367,000 jobs.

That makes agriculture second only to manufacturing in the state’s economy, according to calculations by the Minnesota Department of Agriculture.

MinnPost photo by Sharon Schmickle

It will cost more to raise these pigs than what they will fetch at market.

Hunker down or head for the exits
Some farmers are hunkering down for survival. 

Heather Thyen said she and her partners in their Grove City dairy operation have cut staff, trimmed expenses everywhere they can and refinanced loans to get the benefit of lower interest rates. Now they milk the 80 cows themselves while they also work off-farm jobs.

“I leave for work by 6 a.m. and I don’t see my bed until midnight,” Thyen said. “I’m running on five hours of sleep a night.”

But cutting corners on the farm means cutting out someone else’s income — from the laid-off farm hands to the local farm-supply stores, she said.

Meanwhile, other farmers are ready to call it quits without waiting for the banks to step in. 

Scott and Greg Schley — brothers who grew up pig farming near Dodge Center — already had taken town jobs before the bottom fell out from the swine market.

“Now we have to work off the farm to support our farming,” Scott said. 

With off-farm jobs scarce too, they’re near the end of their willingness to pour money into a losing operation.

The Schleys are not alone in looking toward the exits.

More than 8 percent of some 3,000 farmers who participate in a the Minnesota State Colleges and Universities’ Farm Business Management Education program have been forced out of business this year or expect to be shut down by year’s end, according to a survey of instructors.

And nearly 40 percent of the farmers enrolled in the program expect to lose money this year, said the instructors who were surveyed in July. Businesses within rural communities also are being hurt, and there is a real need for more mental health services, the instructors reported.

Because the survey reflects conditions through the first half of this year, it doesn’t tell the full story of the farmers’ deepening financial problems, said Richard Joerger, MNSCU’s director for agriculture and business programs.

“This was the easy six months,” Joerger said. “We have to worry about next spring.”

Global problems, local headaches
Most of the worry is over livestock farmers who were hit with the double whammy of high energy and feed costs while prices for their meat and milk plummeted below break-even levels. The price Minnesota’s dairy farmers got for milk in July was just over half of what they had claimed a year earlier, according to the National Agricultural Statistics Service. (PDF)    

Hog prices were down sharply too.

There are many reasons the prices collapsed, beginning with oversupply. Many dairy farmers also blame consolidation in their industry putting more control over production and processing into the hands of a relatively few large operators.

But a slump in global trade is a big factor, too. Minnesota ranks seventh among U.S. states in farm exports, selling more than $5 billion in foodstuffs overseas each year.

“Right now, our pork and dairy producers are facing a particularly difficult time. There are a variety of factors at work in each case, but a common link is the global recession that has slowed demand for U.S. agricultural products in other countries,” State Agriculture Commissioner Gene Hugoson wrote in a recent column. “For some producers, this downturn is the final straw forcing them off the farm.”

Pork products, especially, have taken a hit in overseas markets after a global panic over the H1N1 flu virus prompted some countries to close their borders to pork from North America. Even though health officials say no one catches the flu from eating pork, farmers have failed in their efforts to erase the name “swine flu” from discussions of the pandemic.

Crop farmers still have a good shot at holding their own this year. To be sure, corn and soybean prices have dropped from last year’s record high levels. But prices closer to normal still give farmers something to take to the bank.

“This is a tale of two sectors,” said Robert Craven, who directs the University of Minnesota’s Center for Farm Financial Management. “Most of the crop producers have done well. The livestock farmers are on the other end of the spectrum with a lot of stress.”

Still, some analysts worry about the crop market too. One factor driving last year’s prices was an expectation of a worldwide grain shortage; now the Food and Agricultural Organization of the United Nations says that supplies of wheat, corn and other grains are satisfactory. Another factor was the diversion of corn to ethanol plants, an industry now struggling with its own financial troubles. Yet another factor was growing worldwide demand for grain-fed meat; now, as farmers shrink their herds, feed demand shrinks too.

A queasy feeling of déjà vu
Minnesota has weathered the ups and downs of farming for decades. Some contractions have stood out as far more damaging than others, most recently the farm crisis of the mid-1980s.

This year’s steep price drops are giving some farmers and agricultural experts “a queasy feeling of déjà vu,” taking them back to that crisis, Daniel Rozycki, an associate economist with the Minneapolis Federal Reserve wrote in a July paper.

“The similarities in agricultural conditions, coupled with the more general recent increase in bank failures, raise the specter of a repeat crisis for agricultural banks,” he wrote.

But he sees mixed prospects for a repeat of the crisis.

“On one hand, farmers and banks are financially strong, carrying lower debt loads and higher capital than ever before,” he wrote. “But on the other hand, the overall level of risk to which banks are exposed might be greater than it was a generation ago.”

Here are some worrisome similarities to the 1980s: Corn, wheat and soybeans — three key crops in this region — all doubled or tripled in price from 2006 to 2008, just as they did in the 1970s. Farmland prices, for their part, rose steadily throughout the decade and reached record highs in 2008. Now commodity prices have fallen sharply, and farmland prices appear to be receding too.

Here are reasons for hope: American farmers are carrying less debt than ever before, roughly half of the debt to equity ratio as in the late 1970s. Balance sheets also are healthier at ag banks, and loan portfolios are much more conservative, reflecting stronger risk management today than in the 1980s.

Still, Rozycki concluded that the horizon is partly cloudy. Ag banks win stronger ratings from examiners than other types of banks can claim. But they “have nonetheless deteriorated,” he said. And for two decades their average loans-to-assets ratios have been on the rise.

“In this respect, the average contemporary ag bank resembles the banks that were headed for trouble in the 1980s,” he said.

Further, he said, “because farmland is one of the biggest assets a farm has, the debt-to-asset ratios that look so good today are extremely sensitive to changing land valuations. To the extent that falling land prices reduce the value of assets and equity on farm balance sheets, they will surely lead to rising debt ratios.”

Priesler at the farmer-lender mediation program also worries about trends that parallel the 1980s.

What gives her hope, she said, is that “we have a very educated farmer this time…. It’s a different ball game.”

Sharon Schmickle writes about national and foreign affairs and science. She can be reached at sschmickle [at] minnpost [dot] com.