The Fed’s Promising and Troubling News

February 4, 2011

The Federal Reserve Bank of Kansas City might have well asked, “do you want the good news or the bad news,” prior to releasing two recent white papers about the farm economy.

On one hand, the Fed bolstered spirits by noting that agriculture has been in the driver’s seat of America’s recent economic recovery. On the other hand, the Fed warned that this bubble is in danger of bursting, turning a promising dream into a nightmare not seen since the farm crisis of the 1980s.

First the good news.

“In 2010, rural America was at the forefront of the economic recovery,” read the Fed’s white paper titled “A Rural Rebound in 2010.”

“[R]ising exports of farm commodities and manufactured goods spurred job growth and income gains in rural communities,” the paper explained. “If recent history holds true, rural America could lead U.S. economic gains in 2011.”

This point has not been lost on farmers’ urban neighbors, who are hungry for jobs. In fact, the Wall Street Journal noted in an October article that “growers’ improved lot is rippling out to other industries.”

The Journal further explained that rebounded commodity prices, in addition to helping stimulate the economy, have driven down taxpayer cost for farm policy.

Sounds pretty promising. So what’s the bad news?

According to the Fed’s follow-up white paper, “Farmers have significantly increased their debt levels in recent years…the fastest increase since the prelude to the 1980s farm debt crisis.”

Then came the bombshell. “Today’s rising debt raises questions about whether U.S. farm operations will face financial stress in the future…If farm financial conditions were to deteriorate rapidly, no producer would be immune to rising financial stress.”

That is sobering news for a struggling national economy that is dependent on rural America right now. Especially when you consider that farm finances do change rapidly because of the unpredictable nature of Mother Nature and volatile markets distorted by foreign subsidies and tariffs.

So what do farmers have available to help them weather the coming storm?

Not enough, fears Larry Combest (R-TX), the former Chairman of the House Agriculture Committee.

“If the bottom falls out on agriculture, existing farm policy is already too weakened to prevent a crisis,” Combest said.

Couple an already weakened policy with an onslaught of attacks against U.S. growers—ranging from environmental zealots, to onerous regulations, uncertain tax policy, and a World Trade Organization with an anti-farmer agenda—and the future is far from certain.

Too bad certainty is exactly what rural America and a limping U.S. economy need right now.