Farming From Boom to Bust

Brand new buildings, state-of-the-art field equipment, computer-controlled automatic livestock feeders and even cleaning robots to scrape manure from the barn floor – all expensive luxuries probably unattainable for most small-scale American farmers. In Iceland, on the other hand, small farmers do enjoy those luxuries.

 Icelandic farming, a centuries-old way of life, changed rapidly in recent decades as farmers took advantage of their country’s economic boom, turning traditional family-run farms into high-tech agricultural operations. But in October 2008, the nation’s economy collapsed. The cost of the feed supplements, fertilizers and other imported goods farmers require more than doubled.

Those farmers who recently took out loans for farm improvements now also wrestle with the burden of barely-manageable interest rates, around 18 percent.

Such loan problems plague Adalsteinn Hallgrimsson, a tall, thin, bespectacled 53-year-old who operates a large dairy farm called Gardur in Iceland’s mountainous north. Among its most expensive features, Gardur boasts two milking robots in a barn just completed in 2007. To make those improvements, Adalsteinn and his brother Gardar entered into the popular practice of taking out foreign loans, mostly in Swiss francs and Japanese yen.

 When the value of the Icelandic krona fell by more than 50 percent, the cost of paying those overseas loans suddenly doubled. “The situation before is that they were coping (with payments), but not more than that,” explained Ingvar Bjornsson, an agricultural extension office agent overseeing the northern region where Gardur is located.

“What happened in October was that their loans doubled overnight . . . so they went into a holding situation.”

Many farms bankrupt

Ten to 15 percent of northern farmers are now technically bankrupt, he estimated.

 The Hallgrimsson brothers can manage only interest payments, not even attempting to pay down the loan principal. Basically, they’re treading water.

For such farmers, perhaps the most obvious question is: Why did they take out those expensive loans in the first place? Especially for improvements that seem more luxury than necessity?

Excessive optimism seems to be the answer.

"It is easy to say afterwards that you should have foreseen this," Bjornsson explained. "All people anticipated that there would be a correction of the exchange rate (for foreign loans) . . . . They were all anticipating that the loans would increase about 20-30 percent in a period of time. But not 100 percent in one night."

The plight of the men and women who work the glacial valleys of northern Iceland in many ways exemplifies that of farmers all over the small island nation. But surprisingly, bankruptcy isn’t their most urgent problem. For the most part, even farmers deeply in debt aren’t being driven off their lands or forced to sell off the equipment they borrowed heavily to purchase – at least, not yet -- because foreclosing on farms won’t do the banks any good.

 For one thing, chances are slim that anyone else would have the means to buy them right now. But farmers do soon need to scrape together the money to buy supplies for this season’s work.

Supplies must be mported

Everything from fertilizer to fuel to plastic wrap for silage must be imported from overseas. What once was cheap for the wealthy nation, now, because of its weakened currency, comes at a punishing cost.

 The problem’s roots run even deeper than the economic collapse. Since 2005, the government subsidies paid to Icelandic farmers for their products increased consistent with the currency’s "natural," or expected, rate of inflation – a total of about 40 percent.

On the other hand, the average fuel price has increased about 150 percent in less than four years; the average fertilizer cost, about 170 percent.

"The farmers are facing a strange situation," said Tjorvi Bjarnason of the Iceland Farmers Association. "They have to begin fertilizing the land in May, but don't have the money to buy fertilizer. Some can't even pay for last year's. Then in June or July they have to buy plastic wrap for their hay bales, which is also very expensive." That makes even farmers’ immediate future fraught with uncertainty, Bjarnason said. "Many don't know what they will do."

Just a few miles down the road from Gardur, resting low on the slope of a mountain peak, stands Hrisholl, another, smaller dairy farm. Owner Sigurgeir Hreinsson feels the pain of increased costs as much as his neighbors, but through careful planning he’s avoided the loan troubles facing other farmers.

Cautious few faring better

Hreinsson, a wiry, quick-moving 50-year-old with graying hair, built a new addition onto his old barn before the crash, but intentionally kept it as small and inexpensive as possible. He has one milking robot, but feeds his livestock by hand. He stores his grain in a homemade wooden bin.

He ticks off his costs in 2008 -- the most significant are grain and feed supplements for the cattle, and 2.2 million krona (then roughly $35,000 US) for fertilizer imported from Scotland. His fertilizer costs alone have gone up 230 percent since 2005, Hreinsson said.

To cope with rising costs, Hreinsson now plays it even safer when making improvements on the farm. His metal stall dividers need work, but “when the economy in Iceland was going on its head,” he said he decided not to buy replacements – he and his son can weld some next winter.

“For farms like Sigurgeir's, for the next few years he won't focus a lot on renewing things like he mentioned in the old barn – he will build things himself . . . and try to cut all costs to cope through this period,” Bjornsson said. It’s a gamble that the agricultural economy will fully recover, and that the farm’s facilities and equipment can hold out until it does.

“Farmers are using what they have . . . so they can delay the effects of rising costs for a period of time,” Bjornsson said. “But in the long run, of course, it doesn't work.”