Wall Street Journal: Glory Days Fade for US Farmers

Many Midwest farmers worry that the combination of lower crop prices and high costs will usher to an end, by next year, one of the most flush periods in American farm history. This year, the U.S. Agriculture Department is predicting that U.S. net farm income will hit $95.7 billion, up 10.3% from last year's $86.8 billion and nearly double the $58 billion of two years ago. Annual U.S. farmer profits bumped around between $40 billion and $60 billion for seven years until 2004, when they rose to $85.8 billion. Now, farmers fear a big drop in next year's profits. Most economists figure the Farm Belt can weather a slowdown, partly because farmer balance sheets are strong, and partly because federal mandates will increase the amount of corn consumed to make ethanol fuel next year. Also, economists think global demand for U.S. crops will remain robust despite recent economic troubles.

The uncertain outlook already is expected to cool demand for Midwest farmland, where prices have jumped by double-digit percentages for four consecutive years. In June, a piece of McDonough, Ill., farmland sold for $7,750 an acre, just 20 months after the seller had paid $4,700 for it.

Prices of corn and soybeans, the nation's two biggest crops, have dropped by half since early July, when fears eased that Midwest floods had reduced the potential size of crops.

For many growers, their breakeven costs have climbed so high that they could lose money next year even if crop prices are above the levels long thought to be too strong to warrant subsidy checks from the U.S. government. Farm trade groups and Farm Belt politicians already are pressing the Bush administration to interpret the newly adopted five-year farm bill generously.

Lower corn prices help ethanol producers, because corn represents about 75% of their costs. But the falling price of crude oil has depressed the price at which the companies can sell ethanol, which competes with gasoline. The ethanol industry's 50% profit margins of four years ago, which helped ignite a plant-building boom across the Midwest, have shrunk to less than 5% at many companies. New construction projects are being halted.

Economist David Oppedahl at the Federal Reserve Bank of Chicago says farmers have unusually strong balance sheets. The debt-to-assets ratio of the farm sector is just 9%, down from its peak in 1985 of 22%. While many urban families heavily leveraged themselves to buy homes in recent years, many farmers were still so debt-adverse that they bought land with cash or made big down payments.