After 110 years of doing business in the farm heartland of America, the Steele State Bank in Cherokee, Iowa, closed its doors on Jan. 25. This little bank had withstood the ravages of the Great Depression -- but it wasn't able to cope with a major agriculture crisis sweeping through the central farm states.
It's just one of a score of rural banks that have gone belly-up since mid-1984. More banks and credit associations are sure to close their doors as thousands of farmers who can't repay current debts are forced out of business. The situation is most acute in the Midwest, but it is spreading to California and other farm states.
Sky-high interest rates (bank lending rates have come down elsewhere, but not in farm country), low prices for crops, the impact on exports of the overvalued dollar and staggering losses in the value of their land and equipment are pushing farmers into bankruptcy and ruin.
In a telephone interview from Kansas City, Marvin Duncan, economist and vice president of the Federal Reserve Bank, said that farm liquidations and partial liquidations in the last half of 1984 were running at "three times the rate" bankers consider normal.
Because land values are plunging -- farm acreage in the Midwest can be bought at a 40 percent discount from peaks hit in 1981 -- more and more farmers have worsening debt-asset ratios. A survey just conducted by the American Farm Journal shows that 21 percent of farmers in the central states have debts that have grown to the dangerous level of 70 percent or more of their assets. That is double the percentage in such dire straits less than a year ago.
John Marten, staff economist for the Farm Journal, said in an interview: "When the debt-asset ratio passes 70 percent, with the returns being what they are, cash flow is negative and the deterioration is substantial. That calls for radical surgery."
Iowa State University economist Neil Harl and other farm experts, along with farm-district politicians and lobbyists, have been begging the Reagan administration and Congress to pay heed by starting some sort of expanded loan-guarantee program. "There is genuine economic fear, and growing anger," Harl told me.
The situation is somewhat analogous to the excessive debt piled up by Third World nations that were fed loans by banks counting on a payoff from ever-inflated prices. Duncan warns that a shakeout is now inevitable "because the hard reality is that some kinds of agricultural production in this country (such as wheat) are in danger of being priced out of world markets."
Nonetheless, as in the Third World, there is an immediate problem that needs to be dealt with, for the sake of compassion as well as to minimize the ripple effect of an agricultural crisis through the rest of the economy. By Duncan's own assessment, unless there is dramatic "intervention" by the government in the next 90-120 days -- before spring plantings are completed -- farmer bankruptcies will pile up. The casualty list could be 10 to 15 percent of the farm population in some states.
Harl urges a system of federal and state help based on a lien against farmland, with the expectation that the public would share in any profits on future land value. (This would compare to the public's bailout of Chrysler, which returned a profit to the federal government.) "By themselves," says Harl, "farmers can't make their payments, and the lenders can't afford to wait. I'm an economist, and I believe in the market economy too. But there comes a time when government must intervene to avoid massive economic wreckage."
Even though the bank prime rate has plunged nationally from 13 percent to 10.5 percent, the rates that farmers must pay as they try to borrow money to finance new crops run from 13 to 14 percent. "The critical thing is interest rates -- we need relief," said Marten.
The problem, of course, is a classic Catch-22: as farm debt soars and the value of farmer assets declines, more farmers careen toward bankruptcy and become a bad risk for banks, already overcommitted in their agricultural loans.
So far, the Reagan administration -- to the consternation of Republicans who will have to run for reelection in 1986 -- has paid little attention. It is concentrating instead on the need to make budget savings by cutting back farm-support programs.
"Given what is happening in rural America, the administration's timing is abominable," according to one of those who will be up for reelection next year, Sen. Mark Andrews (R-S.D.). "This isn't the year to begin tampering with agriculture's safety net."