After more than six years of unprecedented boom in the U.S. farm economy driven by a government-backed drive for biofuels, record low interest rates and rising food exports, American grain farmers and their bankers are bracing for change.
U.S. farmers have just finished harvesting their largest corn crop in history - taking the steam out of a long bull market. Earlier this month the Obama administration also signaled that renewable fuels were losing political favor as the Environmental Protection Agency proposed cutting the amount of corn-based ethanol oil refiners must blend into U.S. fuel supplies.
The EPA news sent the corn market to its lowest in 3 years, with prices trading near $4 a bushel on the Chicago Board of Trade, compared with record levels above $8 in the summer of 2012 in the midst of the historic Midwest drought. Soybeans, wheat and other crops have eased from a year ago, along with corn, the grain bellwether, with almost 100 million acres planted in the United States, the world's largest corn grower and exporter.
A growing number of farm bankers and economists interviewed at a Chicago Federal Reserve conference and the American Bankers ag meeting in Minneapolis this month warned farmers to brace for change in the coming year. Grain farmers will see their income shrink even as costs to produce crops stay high. Farm land rents and seed costs are among the biggest costs that may resist declines in the face of falling crop revenues, but fertilizer also remains pricey, they said.
Additionally, during the years-long grain boom many farmers paid cash for farm machinery and land at record high prices - which kept their debt low but cut the amount of cash on hand. So far, interest rates are staying low for refinancing or fresh debt, working in farmers' favor. But debt pressures remain intense in some pockets of the Corn Belt among many younger and more aggressive farmers who hopped on the boom. So distress sales of assets or even foreclosures and bankruptcies look inevitable as a "down" cycle returns to grain prices, farming experts say.
"The year 2014 will be the sobering up period," said Michael Swanson, an economist and senior vice president with Wells Fargo, the largest private lender to U.S. agriculture.
He said pockets of distress in the northern Midwest were evident. Last year in Minnesota there was a $2.75 per bushel gap in the cost of production between the best and worst growers in the state, Swanson said.
"Four-dollar corn would be bust for the high-cost producers and a burden for the low-cost producers," he said. "We will see a lot of stress with $4 corn, which will transform the market."