Trump’s War on US Farmers Pt. 1 | The Economics of Farming
The loss of income and customers facing U.S. farmers due to crop sale losses makes headlines routinely, but the increase in farm lending and sales of farms has not. Read on to understand this underreported part of farm economics.
The headlines for problems faced by U.S. farmers have become routine over the last two years. The most typical will tout a bailout, like the $16 Billion bailout proposed by Trump in July 2019. The other side of this headline essentially explains why there needs to be bailout, pointing out the loss of income faced by farmers due to losses in crop sales. And then between the two is a look at the commodities market, to look at disruptions to commodities futures prices in U.S. agriculture indicating that investors believe that harm is being done.
So, the story of U.S. farmers during the Trump trade war as it’s currently being told is essentially …
- The trade war prevents U.S. agriculture from being sold to former customers, leading to lost sales, lost customers, and conversion of business to China
- These losses need to be offset by loans from the U.S. government
- Futures pricing indicates this is bad for the U.S. economy and the U.S. agriculture sector
All of those statements are true, but there’s an implication from all of these stories. Namely that once the trade war ends, things will go back to normal for U.S. farmers.
And it would, if U.S. farmers were keeping their farms. But they’re not.
To understand what’s happening in the U.S., we need to look at another nation that’s facing a larger farming crisis — India.
In November 2018, tens of thousands of Indian farmers marched on Dehli, demanding relief from multiple stresses to their livelihoods. It was the 4th protest of this kind in 2018, as Indian farmers (who represent a significant voting block) were demanding higher crop prices, and relief from soaring farm loan debt. The farming crisis in India is severe. The population of India is 1.37 Billion people, with approximately 50% of the population working in the Agrarian sector. Over 650 million people work in Agriculture in India, but the industry itself only contributes 15% of Indian GDP annually.
The Indian government sets prices for agriculture, lowering the value of Indian crops. Food is cheap, but by proxy, it means the labor to produce that food is also devalued. 85% of Indian GDP is generated by half the country, while the other half of the country fights for scraps to produce food for themselves and the world. It’s a glaring example of wealth inequality.
If you step back and look at how a farm works, it becomes clear that farms essentially operate the same way as other forms of real estate. A person owns a plot of land. They earn money based on how they use the land. If they build a house, they can live on it, and subsist. If they build an apartment building, they can subsist in the building, and then charge rents to any tenants. Essentially, the amount of wealth that a landowner can extract is based on their ability to convert the land into cash.
The essential formula for how a farm makes money is growing crops. Resources are invested into the land, via human labor, equipment, fuel, seeds, fertilizer, water, and other essentials. Air and Sun are typically the only free inputs for a farm to grow food; the rest costs money. If there are enough crops produced at a high-enough price, the farm makes money. If the price of the crops is below the cost of the operation, the farm loses money. To cover the operation of the farm when cash is scarce, or when cash flows themselves are staggered, farmers will take out operational loans to cover costs. The loan acts as bridge capital to let farmers buy seed, fuel and other inputs to grow crops, with the expectation being that a high-enough yield at a good enough price will yield a profit, and allow the farmer to pay off the loan.
In practice, in India, farm loans have turned farmers into permanent debtors. They earn just enough money to make loan payments, but rarely enough to pay off the loans entirely. The loan crisis and other problems based on the fixing of prices has been growing for decades, with government promises to forgive loans or waive loan payments that never seem to materialize. In 2017, proposals for farm bailouts created tensions in India among ministers, including Reserve Bank of India Governor Urjit Patel who warned that the program would cause loan defaults to rise, force additional government borrowing and drive down bond yields.
60.4% of India’s land is farmland, versus 44% of the United States. 650 million people work Indian farmland, with 42% of those people (273 million) wanting to quit farming. The land itself has fertility problems, the value of crops is low, and the accumulation of debt is high. It’s hard work with little escape. If you have to rent the land as well, it seems nearly impossible to make a living without back-breaking, soul-crushing labor.
In other forms of real estate, if the current method for extracting value from the land is failing, you can pivot to other methods. Suppose that you own an apartment building, but find that rents for the living spaces are too low. With a capital investment, and friendly regulation from local zoning boards, you could reclassify part of the building as commercial, then rent that space to a local business. If you own a house, you could spend money to convert it to a boarding house and take tenants. These kinds of investments can only be made in one of two ways.
- You invest with capital you have. If you have money saved that can finance changes to how you extract value from your land, then you can use your own. Or, if people give you money, like family or friends.
- You take out a loan based on your available credit. If you don’t have money saved to finance changes, or don’t want to risk any capital you have accumulated, you can take out a loan. The loan could be at low to zero interest from friends, or organizations like Kiva. Or it could be at a high-interest rate, depending on how it’s financed. Like, if a person uses a high-interest credit card to pay for improvements, that essentially becomes a high-interest loan betting that the value of the improvements will, over time, outweigh the cost of the loans.
So, this is all common sense, if you want to change how you do business, you either use money you have or borrow other people’s money.
Theoretically, a farmer could do something similar. If the value of the land can’t be extracted via crops, it could be extracted via rents. A farmer could become a landlord to other farmers, and let them rent parcels of land to do their own farming. A farmer could convert some farmland to housing, or give it to commercial interests. Essentially, just like any other real estate owner, a farmer with land is an entrepreneur who can find ways to make money from their land, and within the farming community in the United States, blogs exist to help farmers think of creative ways to earn money. All of these changes, however, require investment, and investment requires capital, and as noted, there’s only two ways to get that capital.
Savings rates for Indian farmers are practically non-existent. And, due to the prolonged crisis, Indian farmers are out of credit. The loans they have taken out are operational loans, used to pay for the activity of farming itself, versus loans to make any capital improvements. Even if the farmers had the credit to take out loans, or the savings to do improvements without them, the land itself is not valued. You can’t put housing on Indian farmland and expect to make money, let alone a commercial development. That type of development is restricted to the cities at present.
Some farmers in places like India have, for decades, been getting out of the business by selling their land. The Economist first noted this trend in 2009, in an article titled “Outsourcing’s Third Wave” which essentially posited that the sale of farmland to outside investors in these countries was a form of neo-colonialism; the author of the article may disagree with that conclusion, but it’s the one I drew from it.
Deutsche Bank has also been advising clients about farmland investment for many years. According to one 2012 prospectus they published, Chinese firms were among the heaviest investors in farm land purchases. In Brazil, for example, two Chinese firms purchased 400,000 acres of farmland for the growth of soybeans. The Economist in 2014 said that farmland remained a good investment based on simple concepts; there are more people, they’ll need to eat, but the amount of available farmland can’t grow. Controlling the farms, and the food they produce, is an essential requirement for human life on Earth. Farmland itself becomes more scarce over time, which therefore makes it a valuable commodity. Farmland can be used for housing and commercial buildings, but land for housing can’t necessarily become farmland, due to the needs that plants have to grow.
But as temperatures rise, as seasons become volatile and weather less predictable, the ability to extract food from farmland becomes scarce. India, unfortunately, while it has a lot of farmland, is affected drastically by these kinds of problems. As I’m typing all of this, the Indian farm crisis continues there. Farm prices in India remain flat, farmers are poor, and debts are piling up. And part of the story of the Indian farm crisis is the suicide rate among farmers. Essentially, 13 of every 100,000 farmers in India commits suicide due to the amount of debt they face.
A similar story is playing out in the United States, with one key difference …
The value of U.S. farmland has been steadily rising since the start of Trump’s Trade War.
This brief explainer doesn’t do complete justice to the economics of Farming, but gives enough of a basis of understanding to delve into what’s happening in the United States.
In Part II, we’ll examine what’s been happening to the U.S. farm industry after two years of Trump’s Trade War, and explain the real winners and losers in that fight as it drags on.