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3614 Administrative Services Building
Ames, Iowa 50011-3614
(515) 294-9915

9/29/98

Contacts:
Robert Jolly, Department of Economics, (515) 294-6267
Alan Vontalge, Department of Economics, (515) 294-6311
Elaine Edwards, Extension Communication Systems, (515) 294-5168

FARM FINANCIAL CONDITIONS SHOW SIGNIFICANT DOWNSIDE

AMES, Iowa -- If commodity prices remain 15 to 30 percent below 1997 average levels, Iowa may see significant and widespread financial stress, according to an Iowa State University study of farm financial conditions.

"This isn't a repeat of the 1980s when we struggled with excessive debt, high interest rates and crashing asset values -- but the potential for increased financial stress is very real," said Robert Jolly, Iowa State University professor and extension economist in the Department of Economics.

The study, conducted by Jolly and Alan Vontalge, extension program specialist with the Department of Economics, is based on financial information obtained from members of the Iowa Farm Business Association. "The quality of the data is excellent and the IFBA members are fairly representative of Iowa's mainstream commercial farm businesses," Vontalge said.

Iowa farm businesses generally entered 1998 in sound condition. Most farms, 86 percent, were financially strong or stable in terms of income and net worth. They controlled nearly 80 percent of the debt in the sample. Financially stressed farms made up 14 percent of the sample and owed approximately 23 percent of total debt.

"However, with commodity prices for calendar year 1998 projected to average 15 to 30 percent below year-earlier levels, estimated 1998 farm income for sample farms will drop 60 percent -- from $68,000 in 1997 to slightly more than $29,000 in 1998," said Vontalge. "Increased farm payments offset income declines somewhat. Our estimates show an average payment of $21,000 per farm or 72 percent of net farm income."

Farms in strong or stable condition should still meet their cash obligations for 1998, the economist noted. But financially stressed farms will experience a significantly greater decline in net farm income. Farms in weak financial condition, those businesses that can be restructured and remain in farming, will see a 140 percent drop in income. Farms in severe financial condition, only 3.4 percent of the sample, have a projected cash flow shortfall of more than $54,000 that nearly equals their average equity of $65,000.

"The real uncertainty is the likely duration of low commodity prices," Jolly said. "A one-year downturn can be managed by many farmers and their lenders. But if prices remain at average 1998 levels for the next two to three years, then financial stress will increase significantly."

The report's estimates suggest that if lower prices continue for the next two years or so, as many as a third of Iowa's commercial farm businesses may require financial restructuring or liquidation. Farms in this condition control approximately half of the debt in the sample. An adjustment of this magnitude would pressure financial institutions and land markets.

"The risk of increased financial stress is very real. Farmers, lenders and farm leaders need to substantively respond to this emerging problem. Longer-term efforts to increase efficiency through research or improved market access are likely to prove beneficial. However, they hold little promise for resolving near- term financial adjustment problems," Jolly said.

"In the short term, many farmers will benefit from programs offering financial counseling and business planning," said Vontalge. "Many producers face significant decisions about their ability to compete under what may be fairly arduous conditions. For them, delaying decisions and actions will only make things worse."

"And the Freedom-to-Farm act needs to be carefully reassessed both in terms of its objectives and design," Jolly said. "This act may represent the best deal farmers could cut in 1996, but it may not be the best deal for society. Given our experience this past year and the challenges that agriculture will likely face in the future, a renewed effort to look at the consequences of increased price volatility, the cost of risk bearing, changes in regional competitiveness and the long term impact on farm families and rural communities is warranted."

A copy of the report, "How Many Iowa Commercial Farm Businesses Will Survive Until 2000?" is available on-line at the URL: https://www.extension.iastate.edu/Pages/communications/FarmFin/

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