Bankrupt Farmers

Bankruptcy among farmers in the Mid-West is on the rise. This coincides with a fall in prices of not only farm products but input factors such as oil and petrol as well. There is overproduction. This in turn is due to credit expansion that has now come to an end.

Large Mid-West farms have adopted an industrial approach to farming, including an industrial approach to financing. Capital goods such as tractors and harvesters are financed with loans. Farmers do not save money for future investments, instead they borrow and invest when credit is cheap. This means that investments in farm equipment is centrally orchestrated through the interest rate set by the central bank. Investments happen all at once. What would otherwise have been a randomly distributed activity becomes an activity synchronized through central planning. The result of this is the boom and subsequent bust known as the business cycle, and it appears that we now are in the bust part of the current cycle.

Going forward, we can expect prices to drop further before going up again. Once we reach peak bankruptcies, prices will bottom. Thereafter, overproduction will gradually turn to underproduction. Prices of essential goods will rise, prompting fear of price inflation. The text book response to this by central bankers is to set interest rates even higher, thereby exacerbating the problem. Not only will the cost of living go up, the cost of borrowing will go up too. However, this will continue until the central planners again find it necessary to stimulate the economy with cheap credit, thereby starting a new cycle of boom that will inevitably be followed by a bust.

By Lozsie - Own work, CC BY-SA 4.0, Link