After more than six years of unprecedented boom in the U.S. farm economy driven by a government-backed drive for biofuels, record low interest rates and rising food exports, American grain farmers and their bankers are bracing for change.

U.S. farmers have just finished harvesting their largest corn crop in history—taking the steam out of a long bull market. Earlier this month the Obama administration also signaled that renewable fuels were losing political favor as the Environmental Protection Agency proposed cutting the amount of corn-based ethanol oil refiners must blend into U.S. fuel supplies.

The EPA news sent the corn market to its lowest in three years, with prices trading near $4 a bushel on the Chicago Board of Trade, compared with record levels above $8 in the summer of 2012 in the midst of the historic Midwest drought. Soybeans, wheat and other crops have eased from a year ago, along with corn, the grain bellwether, with almost 100 million acres planted in the United States, the world’s largest corn grower and exporter.

A growing number of farm bankers and economists interviewed at a Chicago Federal Reserve conference and the American Bankers ag meeting in Minneapolis this month warned farmers to brace for change in the coming year. Grain farmers will see their income shrink even as costs to produce crops stay high. Farm land rents and seed costs are among the biggest costs that may resist declines in the face of falling crop revenues, but fertilizer also remains pricey, they said.

Additionally, during the years-long grain boom many farmers paid cash for farm machinery and land at record high prices, which kept their debt low but cut the amount of cash on hand. So far, interest rates are staying low for refinancing or fresh debt, working in farmers’ favor. But debt pressures remain intense in some pockets of the Corn Belt among many younger and more aggressive farmers who hopped on the boom. So distress sales of assets or even foreclosures and bankruptcies look inevitable as a “down” cycle returns to grain prices, farming experts say.

“The year 2014 will be the sobering up period,” said Michael Swanson, an economist and senior vice president with Wells Fargo, the largest private lender to U.S. agriculture.

He said pockets of distress in the northern Midwest were evident. Last year in Minnesota there was a $2.75 per bushel gap in the cost of production between the best and worst growers in the state, Swanson said.

He said that “$4 corn would be bust for the high-cost producers and a burden for the low-cost producers. We will see a lot of stress with $4 corn, which will transform the market.”

David Kohl, professor emeritus of agricultural economics at Virginia Tech, noted: “You have a group that is very efficient and doing well, but we’re starting to see stress in that lower affluent economic producer.

“It’s going to be interesting to see this play out this fall and winter,” he said.

Hard or Soft Landing?

Other farm bankers and economists at the Fed conference agreed that stress is here or on the way in grain country, with the debate only on whether there will be a hard or soft landing. Most forecast a soft landing, with limited distressed sales of assets like land or farm foreclosures due to overleveraged balance sheets. Few saw analogies to the 1980s, when thousands of overleveraged farmers lost their farms as interest rates spiked.

Purdue economist Michael Boehlje told the conference there were four major booms in U.S. farm history—including the last six years of the biofuels boom, when plantings and prices both rose to records. What followed those booms, he said, were two busts and one soft landing. The two busts were marked by profound declines in export demand.

“The bust years were triggered by a cut-off in exports,” Boehlje said, noting that U.S. exports remain strong and biofuels corn demand, though it may not grow at the same rate, will still take up to 40 percent of the U.S. crop. “I’m expecting a soft landing,” he said.

A key economic indicator of the health of the farm economy is the value of farmland, which represents up to 90 percent of grain farm assets and is the basis of loan collateral and the wealth effect in farm country. Prices of prime grain land have doubled or even tripled in the last five years as farmers rushed to plant fence post to fence post and feed the ethanol pipeline even as export demand to China and others soared.

Quarterly surveys released this month by the Kansas City, Chicago and St. Louis Feds of more than 400 farm bankers in the grain belt confirmed that farmland auctions are showing a steady to weak tone for the first time in five years. Doubts center on 2014 crop revenue, but other key variables also fueling worry. The status of crop insurance in the absence of a new farm bill was the best example.

“The decline in commodity prices is going to have an influence on real estate. Where we end up is hard to say,” said Curt Covington, senior vice president at Bank of the West. “Say you had 20 percent decline in real estate prices, most farmers’ balance sheets are pretty well protected because there isn’t a lot of real estate debt.”

But if he is not overly concerned about a land bubble popping, cash flow is another matter.

“My biggest concern is not leverage, it’s liquidity—how much working capital is in the balance sheet,” Covington said. “Traditionally, Midwest farmers don’t carry a lot of working capital on the balance sheet.”

Sam Miller, head of agribusiness for BMO Harris Bank, was cautiously optimistic about a soft landing.

“We’ve had some really good years for grain producers. All good things have to come to an end or at least adjust. Seems like we’re in that period,” he said. “Supply has changed. But if you look at exports, they’re robust.”

(Editing by Dan Grebler)