When the farm economy is healthy, the "Main Street" economy is healthy, House Ag Committee subcommittee on risk management ranking member Tim Walz, D-Minn., said Tuesday during opening statements of a hearing to discuss the economic state of U.S. agriculture.
The hearing included input from Nathan Kauffman, Federal Reserve Bank of Kansas City branch executive; Paul Combs, Missouri farm equipment dealer; Steve Verett, Lubbock, Texas, farmer; Dow Brantley, England, Ark., farmer; and Kevin Paap, Garden City, Minn., farmer.
Given lower commodity prices and decrease in net farm income, the committee discussed farm economics within the realm of the second-year farm bill.
"The farm bill is written for times like these," subcommittee chairman Rick Crawford, R-Ark., said during his opening statement. "Agriculture is inherently risky, and the farm bill ensures that there is a suite of risk management tools to help producers."
Kauffman led off his statements explaining crop producers' situations, also highlighting lower commodity prices and steady input prices, while profit margins and land prices in some areas soften.
He said about 60% of banks in his region also have experienced softening in the financial conditions of crop producers, relative to the previous year.
Livestock prices, meanwhile, have escalated following broad sell-offs due to drought. This difference was summed up by another panelist, Paap: "It depends."
"If you're a crops guy in Minnesota, your income's down 65%," he said. "If you're a dairy, you're up 200%." Paap said many factors affect profitability: your age, your rental/ownership situation, your equity, and "most importantly it depends on the weather," he said.
Though the livestock and crops sectors seem to be in different worlds, producers will ultimately be managing their businesses carefully in the next few years, Kauffman said. Overall, farm income has been projected to decline 43% from 2013.
"There's a strong emphasis, a growing emphasis, on working capital and liquidity," Kauffman said. To get through this setback, he said producers also will need to review balance sheets and think very carefully about keeping costs low and efficiency high.
This cutback on inputs and finding new ways to improve crop yields without added costs has hit young farmers, who were targeted for expanding programming in the farm bill, hard.
Kauffman said the last three to five years of rising inputs has created a difficult environment for young farmers to break into the business. They haven't had the opportunity to build equity like older operators have.
"For right now I think it's just a time of looking very carefully at where they can cut costs," Kauffman said of younger operators. But it's not the 1980s.
"On average, leverage is not being used as extensively as it had been [in the 1970s-80s]," Kauffman said. Combs added that interest rates are not at the 18% to 20% levels seen during those times, either, which is a help. But if farmland values continue to decline, it could pinch not only beginning farmers, but also older farmers using that land as equity.
"As the values have gone down, people still own the land, but their net worth is shrinking," Combs said.
Looking ahead, Combs also addressed another financial frustration for the farm sector: Higher IRS Section 179 expensing levels, and the drawn-out path to its approval last year.
With higher Section 179 expensing levels, farmers were allowed to take full depreciation deduction of items in the current tax year, with a maximum deduction of $500,000 and a phase-out threshold of $2 million. This is much higher than the default level of $25,000 with a $200,000 phase-out, which was scheduled to take effect for the 2014 tax year prior to a last-minute tax extenders bill in December, 2014.
"The scale of farming has gotten so much bigger that customers tend to plan their purchases well in advance," Combs explained, noting that uncertainty surrounding Section 179 caused many farmers to delay those purchase plans last year.
"If we can get [Section 179 levels] stable or at least know where we are by the beginning of the fourth quarter, that would really help us," he said.
Continued reading: Farmers: Deflation, not inflation, is worst-case scenario
Catch a replay of the full House Ag Committee subcommittee hearing online.