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Blowing away the family farmer: the debt tornado.

The specter of foreclosure is haunting America's independent family farmers. The staple scene of nineteenth-century melodrama--the villainous banker demanding the mortgage payment on the old homestead--was revived in modern dress in the recent movie Courtry, with a bland bureaucrat from the Federal Farmer's Home Administration replacing the miserly Banker Jones. The forces threatening the thousands of real-life counterparts of Gil and jewell ivy, the couple facing eviction in Country, are more abstract and impersonal than the film suggests. The villains are policies of the Federal government that encouraged people like the Ivys to go into debt and then made it impossible for them to pay off that debt.

According to Emanuel Melichar, senior economist at the Federal Reserve Board, more than one-third of America's commercial farmers are in serious financial trouble, and unless real interest rates come down and debts are rescheduled, many of them will go under. An american Bankers Association survey conducted in 1983 found that 17 percent of farmers with outstanding loans would be unable to make their payments this year. For the first time in history, the total amount of interest payments on farm loans had surpassed the total net farm income. Under Reagan, real interest rates--the average rate minus the rate of inflation--have been the highest in the century.

The debt crisis has fallen most heavily on middle-level farmers, those with gross annual sales of between $40,000 and $500,000. During the 1970s, the number of operators in this category increased by 250 percent. Some of the increase was due to inflation, which raised prices dramatically, but its primary cause was the Federal government's efforts to encourage production for overseas markets. In 1973, Washington sought to counteract ballooning U.S. trade deficits caused by the Organization of Petroleum Exporting Countries' oil embargo by expanding agricultural sales abroad.

Generous subsidies to overseas purchasers through loans from the Commodity Credit Corporation, an undervalued dollar and broad extension of credit to foreign governments by large commercial banks spurred a leap in U.S. farm exports from $8 billion in 1971 to $43.8 billion in 1981. Major purchasers included Poland, Argentina, Mexico and Brazil; all four bought grain on easy credit terms. in the 1980s these monetary and fiscal policies were suddenly reversed, as the international financial community realized debtor nations could not possibly repay their loans without severely cutting back on imports. The international Monetary Fund imposed austerity programs that turned off the tap on money to buy U.S. farm commodities.

in addition, an overvalued dollar due to high U.S. interest rates imposed a 32 percent surcharge on all U.S. exports, according to the 1984 "Economic Report of the President." As a result, agricultural exports dropped more than 20 percent between 1981 and 1983, and real prices on major commodities dropped 21 percent.

The family farmer is bearing the cost of the new policies in the form of low prices, high interest rates and plummeting land values. There has also been a dramatic shift in the structure of farming. "Superfarms," those with annual sales of more than $500,000, account for 25 percent of the total farm output in America, even though they constitute only 1 percent of all agricultural units. According to the Farm Credit System (F.C.S.), if the trend continues, superfarms will make up 6 percent of all farm units by 1995 and will produce more than 75 percent of all farm products.

F.C.S. studies make clear that net farm income will never reach the level of any year in the 1970s. The Department of Agriculture forecasts steadily declining crop prices through the decade.

Unless this direction is reversed, medium-size operators will be squeezed out of business "like toothpaste out of a tube," as a leading agricultural economist put it. They will be replaced by large spreads owned by wealthy investors looking for tax shelters, or by high-equity farmers who want to expand their holdings.

If agriculture were an industry that had resisted innovation and showed declining productivity, perhaps an argument could be made for allowing uncontrolled market forces to clear out the deadwood. But America's decentralized, commercial family farm system is the most successful in the world. Farmers utilize the latest technology, lead the nation in productivity gains and maintain a global competitive advantage, despite the punishing effects of an overvalued dollar.

There is more at stake than economic efficiency, though. A recent study of Nebraska farmers by Larry Swanson, an economist at the University of Nebraska, concluded that if family farms continue to fail at the present rate, rural communities will deteriorate. Agriculture and family farmers in particular are the lifeblood of rural communities. They patronize local stores, have their equipment serviced at local shops and send their children to local schools. If the trend continues toward fewer, larger farms producing an increasing share of our food and fiber -- and claiming an even larger share of farm income--school enrollments will decline by 15 percent, one out of every ten retail stores will close and the labor force will shrink by 7 percent before the decade is out. Many small towns will disappear.

The financial cost of widespread farm failures could be enormous: as much as $100 billion in uncollected loans and business losses. Not only will indebted commercial farmers go under, so will the rural businesses that depend on them. Agricultural banks have already quadrupled their standard loan loss rate (a measure of the reserves they maintain in anticipation of bad debts).

The present policies also encourage wasteful farming practices that do irreparable harm to the soil. Farmers burdened by debts cannot afford to take advantage of tax credits or low-interest loans for soil and water conservation. They have to plant fencerow to fencerow in a desperate effort not to fall further behind in their payments. Unless their debt problems are addressed, they cannot practice careful stewardship of the land.

A new Federal farm policy is needed to undo some of the damage caused by the government's massive shift in direction over the past decade, without bringing back the ruinous overproduction-at-any-cost policy of the early 1970s. A long-term solution, as opposed to a golden Band-Aid, would link farm policy to the fiscal and monetary environment in which American farmers operate. The expansive decade of the 1970s is over and will not return in the foreseeable future. There must be a restructuring of family farmers' debts so that they can bring their agricultural practices in harmony with the foreign and domestic economic realities of the 1980s.

A ration farm program would enable commercial family farmers to produce for actual world need at prices that cover the cost of production. Superfarms should be moved to the back of the line for government support programs. Congress must rewrite the tax code so that it rewards farmers for working the land, not the tax system. We are heirs to a family farm system that is the most productive, innovative and efficient in the world. We owe it to future generations to preserve it.
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Author:Ball, Heather; Beatty, Leland
Publication:The Nation
Date:Nov 3, 1984
Words:1174
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