Farming Through the Low Points (Boom and Bust Part 2)

This is a continuation of a look into our farm’s history and my reflections after reading the K.C. Fed’s paper on cyclical agricultural prosperity. I admit. It’s a little nerdy. I’m trying to keep it fun though.

Look back at part 1 to see at some of the cool stories of our family history. I know just as many stories of hard times. In the ’80’s the debt on the hog floor (built in the ’70’s boom) dragged the farm down. The story is more complicated than that, as locals know, but let’s just say Grandpa made the best of a bad situation. I know it caused a pinch in the farm’s finances but money was always tight…because grandpa would always and immediately reinvest earnings back into the farm. He would improve his herd genetics, upgrade equipment, build fencing, build ponds…you with me here? He reinvested earnings…sometimes to the frustration of my grandmother. They were mostly on the same page…except a few times when she wanted a new oven, a couch or some carpeting. She built her own kitchen cabinets. I assume that was more budget than hobby but we still use them.

Sidebar – I have to pause here to explain the relationship between my grandparents as an uncle once explained it to me. My grandma was, in my grandfather’s mind, his trophy wife. The arrangement, made by her, was simple. She would keep the house, he would be a farmer. She was not a farmer. She certainly did not milk cows. She was beautiful. That was that. Apparently grandpa found that to be a favorable arrangement though he did have a sense of humor. Grandma never knew how many people to cook lunch for. Grandpa would feed the men working on the farm, certainly, but who knows who else would be dragged to the table with him. Also, grandpa considered gardening to be a part of the household. Every year he plowed up a big patch of garden for her. Or he would bring home a truckload of peaches to be canned. Grandma had a sense of humor too, though hers was more subtle.

Things are different in our house as I wash dishes and Julie milks the cow. However, as I learn more about my grandfather I marvel at his strength. He bought a tractor before anybody else had one and borrowed money to do it. Grandpa ran a number of businesses, all to support a central theme. He did row cropping, kept pigs and cattle (and brought in Limousin genetics early on), ran a feed and fertilizer business on the farm, sold Badger equipment and always worked to improve his own land, herd genetics and equipment. Along the way he positively impacted an awful lot of people (and ticked off a few). I feel like I’m weird because I ask cattle to eat grass. I can’t imagine how he felt…his entire life. Just know that grandpa feared the debt he held…and for good reason. He had seen downturns in agriculture and was always planting his earnings back into the farm. I think he would be astounded at current land valuations and heading for cover. He probably wouldn’t be selling land but he would be taking full advantage of the cattle price.

To continue, exports are necessary to pay for imports. You can only pay for products with production. If exports dry up, we are in trouble. More so if debt is involved as in the hog floor above. Grandpa stayed out of trouble by selling feed, fertilizer, equipment and livestock and working to minimize debt. But the ’80’s were hard all the way around. Again from the Fed paper:

During the 1970s, surging exports underpinned a new plateau in agricultural commodity prices, and farm revenues reached a record high. From 1971 to 1973, agricultural commodity prices jumped 75 percent and remained elevated throughout the decade.

But then…

A weak global economy, world debt problems, a strong exchange value of the dollar and trade barriers—including a Russian grain embargo—cut U.S. agricultural exports (Drabenstott). In 1986, agricultural exports bottomed at $47 billion, half the levels posted five years earlier.

Our farm bears few scars of the bad times as evidenced by the fact that there is an unbroken chain of family ownership going back to the 1840’s but neighboring farms didn’t fare as well. The father of one neighbor saved during the prosperity of the 1910’s and bought land heavily during the Great Depression. His risk and prudence set his family up for lasting, generational wealth that benefits them to this day. But there were necessarily folks who either didn’t save in the good times, had it worse than others (losses to illness or war, bad business bets, etc.), sought other opportunities with their capital or otherwise gave up on farming. But, apparently, the largest problem was debt. Once again referencing the K.C. Fed:

During the 1920s and 1930s, the collapse in farm incomes and land prices led to a wave of farm bankruptcies. Facing higher interest rates and lower incomes, many farmers struggled to service the debt they accumulated during the 1910s farm boom. The result was a surge in farm foreclosures during the 1920s and 1930s (Stam and Dixon). According to the U.S. Census Bureau, at its worst, almost 6 percent of U.S. farms were sold in 1933, with 70 percent of the sales due to foreclosure.

The ’80’s saw another wave of farm transfer. If you look at the local plat book there are fields that are owned by the local banks and have been since the ’80’s. What happened? More of the same.

The debt accumulation of the 1970s contributed to the economic calamity of the 1980s. By 1982, when interest rates spiked as the Federal Reserve tightened monetary policy, farmers had more debt than they had capacity to service with their existing cash flows. The result was a farm financial crisis, a rise in farm bankruptcies, and the 1980s farm bust.

With shrinking profits and higher real interest rates, farm asset values and capital expenditures plummeted. After peaking in 1981, the average price of farmland dropped more than 40 percent by 1987, returning to 1960s levels. The farm bankruptcy rate spiked, topping levels experienced during the Great Depression. Capital expenditures on machinery, equipment and land improvements dropped 70 percent below the 1970s highs.

This was exasperated by increased productivity on farms.

Agricultural production expanded as farmers planted “fence row to fence row” and productivity gains emerging from the 1970s “Green Revolution” boosted yields. Weak demand and bin-busting supplies placed downward pressure on agricultural commodity prices, and gross farm revenues fell to 1960 levels. With elevated production costs, farm profits declined. By 1983, returns to operators were roughly 10 percent of the 1970s high.

I would like to point out that this is nothing new. It also happened before the turn of the 20th century (emphasis mine):

The most serious problem by far was low prices.  One can approach this problem in a number of ways, but, simply put, low prices resulted from the fact that the supply of farm goods was growing much more rapidly than the demand for farm goods, which meant that farmers had to accept lower prices for their products over time.  Now it is true that the general price level in the United States was falling through much of the late nineteenth century, but, even in this period of general deflation, farm prices fell more than prices in other sectors of the economy, which hurt farmers in a relative sense.

Low prices hurt farmers particularly hard because many were debtors.  In a deflationary economy, it is especially difficult to repay debts because the real cost of a debt rises as money becomes harder to come by.  During the late nineteenth century, as more and more farmers commercialized their operations, specialized and mechanized, they often took on significant levels of debt, which became harder and harder to repay.  As a result, many lost part or all of their farms, leading to a great rise in the number of tenants and sharecroppers, on the one hand, and the movement of many farmers out of agriculture altogether, on the other.

Back to the story. Things got pretty tight on the farm several times but I never heard Grandpa Tom complain. I mean that. I never heard my grandpa complain. Plastic knees, prostate cancer or blown engine in a tractor…he just took it all in stride. Grandpa said they weren’t aware of the Great Depression, they had plenty to eat. Because of his father’s illness and a mentally handicapped older brother, grandpa was head of household and couldn’t go to war for WW2. The only problem I ever heard of was in the ’80’s but grandpa was able to cover the loan for the hog equipment – though I don’t know how – and I never heard him talk about it. At the same time I watched an uncle refinance his land repeatedly until finally selling his best ground to get out from under it. Farmers were so discouraged through the ’80’s they stopped buying. Either they were convinced that the downward trend would never end or they were buried under a mountain of debt. That’s how my coal miner father became a land owner. Farmers weren’t showing up to buy so, on grandpa’s suggestion, after a whole lot of prayer, thought and worry, mom and dad did.

Obviously my grandpa is a hero to me but he wasn’t the only area farmer to survive the ’80’s. In fact, a number of farmers were able to expand. Just like in other downturns. To contrast that, Julie’s great-grandma Alice married a Fillager late in life. The Fillager family owned 1,000 or so acres 1893. Much more land later.

Fillager

The Fillager siblings didn’t have children of their own so the estate was auctioned off little by little following funerals. Some of that wealth was donated (war bonds), hence the Fillager clinic in Greenfield. I have friends who own Fillager ground (and everyone was convinced there was gold buried on the property so they kept after him for years, “Did you find the gold yet?” He denies finding any. Of course.) Some of that Joseph Fillager land was owned by Julie’s grandparents until the ’80’s. Julie’s parents had several acres until around 2002 but they sold and moved to town. Julie has a great-aunt who still owns a large portion of the farm. Otherwise, it’s all gone. Over 100 years of unbroken family legacy…no family to give it to.

There were financial mistakes made along the way. There was also a genetic dead-end as no Fillagers had kids! Same thing happened on the other side of Julie’s family. Julie’s grandpa grew up poor. His stepmother did not. My understanding is she was part of a prosperous farming family. Her brothers stayed home and farmed and expected her to do the same. Nobody had time for family. Later in life Ruth found a family in need of a mother. Julie’s great-grandma Ruth left the prosperous farm behind and, in the process, lost her claim on the estate (please correct me in comments if I am mistaken here). I guess her siblings held the farm together while they lived but the family legacy ended. There was no next generation to own and work the ground. I’m not even sure where their farm was now. Or Julie’s grandpa’s farm. I don’t think there are even houses at those locations now.

Clarence and Ruth (Mitchell) Ashby

All good things come to an end. It happens. I have the next generation thing covered but how can I keep our heritage in place through the downturn that is eventually coming? And what can I do to positively impact my neighbors so the whole community can weather the storm? Nobody wins if the banks own all the land, not even the banks. They are in the business of loan origination (money creation) not land management. And short-term tenants are hard on the land. In the book Family Wealth the author is discussing drawbacks of perpetual trusts (and I don’t think it’s a stretch to suggest that this thinking holds true to land owned by banks).

…[lands held in perpetual trust] were often poorly administered, because they had no owner who cared about their improvement, since he or she would never own them outright. Many life tenants sought to receive the maximum annual return possible without regard to such a policy’s long-term effect on land’s productivity.

Low prices could crush us…could crush me indirectly. Our friends at the Fed are freightened of deflation. They are working to do everything they can to keep the money flowing through the economy, not just in terms of currency supply but also in terms of velocity. But if it’s not enough…well…then what? What if the dollar strengthens and American agricultural products are more expensive (because of currency valuations) than those of other countries? I’m no mercantilist but I can see the effects on our current way of life. Even the supposedly favorable ratio of debt to equity carried by current farmers could turn sour in a hurry. I have to work to minimize my exposure to those risks by focusing on providing value to customers, lowering my production costs, minimizing my exposure to debt and putting away some cash for a rainy day.

But I’m getting ahead of myself. Farming has seen some rough times. Debt has drowned many farming families. I’ll do what I can to lay out our plan in my next post.

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3 thoughts on “Farming Through the Low Points (Boom and Bust Part 2)

  1. The Austrian An-Cap in me wants to chime in on a few things. But I’m pretty sure you already know…lol. We may be the only two people who enjoy reading Fed Notes and rolling our eyes the whole time. But I’m really enjoying this series.

    • I have read almost everything my search engine can show me concerning this fed report. Almost all of it fits into one category…or comes from one perspective. “We have seen some hard times as farmers and we’re glad that’s all behind us.”

      I am choosing to expand on their historical perspective by including a few anecdotes while ignoring their blue skies. More in the next post. Thank you for reading and for commenting, Charles.

      And go ahead and chime in. Let it all out.

  2. One thing about regional feast and famine: Our own stage of life can have a powerful influence on how we see things. I have no idea where the world was in these cycles in the early 70s. I only know that as a newlywed with a husband who was drafted, we had no money. Then the army realized it hadn’t been withholding the savings bonds we had signed up for. They took about 6 months worth out of the next pay check. That seemed like nearly the entire paycheck. There are reasons beyond our control when things are extreme. Then, before the year was out, the entire base gave us a baby shower, pitched in to help us clear quarters and showered us with incredible kindness and friendship. Sometimes riches are hard to measure. We were still nearly flat broke, but one time we felt terrible and the other time we didn’t care so much. God is good, all the time. Even when we don’t feel it.

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