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- W7653828 abstract "A wave of capital investment has spread throughout the U.S. farm sector in recent years. With booming farm profits, . farmers have made a range of real estate investments, building new structures such as grain bins and machine sheds and improving productivity through expanded pivot irrigation and tiling. In addition, non-real-estate investments have soared as farmers purchased new ve- hicles and upgraded their equipment and machinery. As measured by capital expenditures, farm investment since 2006 has risen at its fastest pace since the 1970s farm boom.This surge in farm capital investment has raised concerns that farmers may repeat the mistakes of the 1970s, when a wave of capital investment led to an overleveraged farm sector. Historically, farm in- vestment has strengthened as farm booms matured and remained high even when profits began to fade. With shrinking profits, farm enter- prises have tapped their to smooth and continue financing their investment spending, leading to expanded farm leverage. U.S. farmers have tended to use farmland, which accounts for 85 percent of farm as- sets, as collateral for additional farm investments. In short, the wealth effect-in which increased fuels increased spending-has been particularly strong in the agriculture sector. But if profits decline, some farm enterprises may risk loading up on debt that they cannot service in future years.Over recent years, in keeping with the pattern of past farm booms, elevated farm profits have enabled farmers to keep leverage ratios near historic lows. But historical trends suggest that the strong effect in the agriculture sector, coupled with low interest rates, could lead to an accumulation of excess debt. This scenario could be a recipe for another financial crisis in U.S. agriculture.This article explores the historical patterns of U.S. farm capital in- vestment and leverage and considers the prospects for another boom- and-bust cycle if historical patterns re-emerge. Section I examines U.S. farm investment and leverage trends over the past century. Section II analyzes how farm profits, wealth, and interest rates each have influ- enced the capital investment and financing decisions of farm enter- prises. Section III investigates current farm debt trends and how farm debt levels could shift over time.I. 20th CENTURY FARM INVESTMENT AND LEVERAGE CYCLESCyclicality is a common feature in agriculture. In the 20th century, the U.S. agriculture sector experienced three cycles of farm profits and investment. During the farm booms of the 1910s, 1940s, and 1970s, profits soared due to surging global demand for agricultural products. Farm investments accelerated toward the end of each boom, as the per- sistence of high farm prices and profits spurred capital investments. Rising profits and robust investments also set the stage for a new lever- age cycle. As each boom faded and profits eroded, farm investment remained elevated and farming enterprises increasingly used debt to finance their investments.The first cycle: 1910-1940The U.S. agriculture sector's first investment and leverage cycle emerged during the 1910s. Sparked by rising food demand and a dou- bling of agricultural exports during World War I, U.S. crop and live- stock prices surged and farm profits soared.1 By the end of World War I, prices received by farmers for crops and livestock commodities had doubled from 1915 levels. In turn, farm profits soared as real net re- turns to farm operators in 1919 reached $23,500 per farm, or $152 billion for the sector as a whole (Chart l).2Although farm profits doubled, capital investments rose more modestly, accelerating toward the end of the farm boom. Initially, farm- ers began to invest in farm real estate in the form of structures such as barns, grain bins, and machine sheds. In 1916 and 1917, spending per farm on structures rose on average by 28 percent per year. Spending continued to rise until reaching a peak in 1919- The mechanization of U. …" @default.
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- W7653828 date "2013-03-22" @default.
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- W7653828 title "Farm Investment and Leverage Cycles: Will This Time Be Different?" @default.
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