FARMERS FACE CREDIT CRUNCH

In the 1940s, on the preface page of a college textbook, farm-finance students used to get this warning: ''Many a farmer would be better off today if he had never had a chance to borrow money at all.''

But in later editions of the textbook, the advice was first abbreviated and then dropped. Talking about the dangers of credit in the boom-time '70s did not seem particularly relevant.

Now, American agriculture is relearning the lesson.

Last year, for the first time in 38 years, total farm debt went down. Farmers talk about cash flow. Many, like Bill Landon of Greenwood, Neb., have grown more cautious.

''There were times I was wanting to expand faster,'' says Mr. Landon, who tries to gulp down lunch while he answers questions. But his father, who is sitting quietly at the end of the table, cautioned against it.

''My dad doesn't borrow a dime,'' Landon says. ''In four years, I'm not going to owe any money either.''

Across America's farm belt, there are vivid signs of a credit crunch. An Indiana farmer points to bankrupt farms on three sides of his house. In Missouri , a farm wife talks about cutting back to a simpler life.

How did the credit crunch happen?

Forget for a moment everything you know about farming - the crops, livestock, heavy machinery, and the people. Look instead at farmland in the way an investor would.

Emanuel Melichar, senior economist with the Federal Reserve Board, explains it this way:

In the 1970s, for the third time this century, America's farm industry experienced a boom. Farmers, seeing the return on their assets more than triple, decided to expand. In doing so, they brought more marginal land into production and bid up farmland prices. In 1975, the average value of an Iowa farm was $188, 600, according to the United States Department of Agriculture (USDA). Six years later, it would cost $556,000.

Even adjusting for inflation, Mr. Melichar figures that the rise in farmland prices created $447 billion in new wealth between 1972 and 1979 (using 1983 dollars). That wealth was not just paper profits, but as with any growth stock, the boom would have to continue to sustain that wealth.

The boom, however, ended in the early '80s. Worldwide recession slackened demand for US food and fiber exports. Huge harvests built up supplies. Prices slumped.

Meanwhile, interest rates on farm loans, which averaged about 10 percent in the late '70s, would top 18 percent by 1981. In 1983, an average farmer's interest payments alone would account for 15 percent of total farm production expenses - twice the percentage of 1970, says Terry L. Francl, agricultural economist with Continental Bank. High inflation, which used to ease the loan burden, was no longer.

Not surprisingly, land prices plummeted. From 1980 to 1983, a third of that ''new wealth'' of the '70s disappeared the same way it was created, Mr. Melichar calculates. In 1983, that average Iowa farm would cost only $403,300.

Land values continue to drop. The latest USDA survey puts the average on April 1 down about 1 percent from a year ago. But the figure disguises bigger declines in the important farming regions of the Corn Belt and the Northern Plains.

How did farmers fare?

If you were Wilfred Oldfather, a small northern Indiana farmer who drives a school bus on the side, you'd be doing just fine, thank you.

His 450-acre farm is paid for. New equipment would be a luxury (the farm's newest tractor is a 1961 model). Mr. Oldfather has no urge to borrow money and expand.

''I haven't taken any of their money. And I'm not about to,'' he says.

Other farmers, like Bob Weber, have expanded profitably.

In the early '60s, Mr. Weber, his father, and his brother incorporated their small 250-acre farm near Dorchester, Neb. Now, the operation boasts 1,700 planted acres and supports 10 times the number of cattle.

But some farmers have been severely squeezed.

In her kitchen in Eagleville, Mo., Jane Richardson tells of her experience with the Farmers Home Administration (FmHA), a federal agency set up as a lender of last resort to farmers.

Four years ago, the Richardsons were encouraged to move their loans from a bank to FmHA. Weather losses and problems with the agency itself caused their debts to pile up. By 1982, the net worth of their farm was a minus $7,000. FmHA has tried to foreclose on them - so far, unsuccessfully.

Last year, 7,529 out of 270,000 FmHA borrowers left farming - most of them probably because of financial stress. In 1982, the figure was higher - 8,227. One-third of all FmHA farm loans were delinquent at the end of 1983.

The FmHA has been under special scrutiny by several rural and small-farm groups (see accompanying story). But other farm lenders are having problems, too.

At the end of 1983, delinquency rates on farm loans were up substantially for the Farm Credit System, which holds the largest share of farm credit, up significantly for commercial banks (5.3 percent delinquent), and up slightly for the Federal Land Banks (0.5 percent).

Is this a farm crisis?

''I think we've been through a very serious period, which we're not completely out of yet,'' says Frank Naylor, USDA undersecretary for small community and rural development, in an interview here. ''But on the other hand, I think it would be an injustice to paint the picture as a major crisis - or to say that the long-term and overall financial health of agriculture is not pretty good. It is.''

The agricultural sector has ''over a trillion dollars of assets against $215 billion of debt. Most commercial businesses would love to have that balance sheet.''

There is underlying strength in American agriculture, agrees Dave Lins, associate professor of farm financial management at the University of Illinois. But farmers don't pay off debt with assets. They pay it off with income, he says.

And one of the worrysome long-term trends in farming is that income has decreased in relation to overall farm debt.

''The debt situation in agriculture should be of more concern,'' Professor Lins says. He sees two other troubling long-term trends:

* There is less liquidity in agriculture. An increasing amount of farmers' assets is tied up in real estate and machinery - items that are often hard to sell off. In a downturn, they can mean a loss.

* Farmers are operating on narrower and narrower margins. In 1970, they cleared as profit a quarter of their gross income. By 1981, although a good income year, the figure was down to 18 percent.

Lins says this increases the industry's potential for boom and bust and makes it increasingly hard for government to control income through price supports.

The 1979 Soviet grain embargo is an obvious example, but there are others.

Liberal credit policies and high price supports have raised the price of farmland above what it otherwise would be, Lins says.

Thus some of the government programs intended to help have actually hurt some farmers.

Many economists say the moral of the current credit crunch seems to be that short-sighted government benevolence sometimes can become a long-term instrument of deception.

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