WASHINGTON, March 1, 2016 - The drop in commodity prices since 2013, falling farmland values and the ongoing decline in agricultural income is making it harder for farmers to repay operating loans and could make credit more difficult to get for many next year, Nathan Kauffman, assistant vice president and Omaha branch executive with the Federal Reserve Bank of Kansas City, told U.S. lawmakers Tuesday.
“Although outright defaults in the farm sector have been limited to date, it is possible that financial stress among farm borrowers could increase through the year,” Kauffman told the Senate Appropriations Subcommittee on Agriculture which was reviewing the state of the farm economy. “This could further weaken agricultural credit conditions and also place additional pressure on farmland values. As a result, some producers, particularly those who are highly leveraged, could face difficulty financing their operations in the coming year.”
The American Farm Bureau Federation is especially concerned about the toll that low prices and shrinking income is having on younger farmers who have never before encountered this kind of adversity, Dale Moore, AFBF’s executive director for public policy, told the panel.
“The big concern that’s out there for us when it comes to the credit side of the equation is the new generation,” Moore said. “The youngest generation that’s just gotten started farming in the last decade -- this is going to be their first downturn and there’s a lot of concern among our members.”
A clear sign of the distress is that farmers are taking much longer than normal to pay back the loans they need to finance production expenses, said Kauffman said. The economist was one of several industry representatives who took part in what the panel’s chairman, Jerry Moran, R-Kan., called a roundtable discussion that was held to kick off the appropriations cycle this year. Newly confirmed FDA Commissioner Robert Califf will testify before the subcommittee Wednesday and Agriculture Secretary Tom Vilsack is scheduled to testify next week.
Kauffman stressed that bankers “expect repayment rates to weaken further in coming months amid further increases in loan demand and increasing demand for loan renewals and extensions.”
Loan defaults have been on the decline for the past five years and there has been no change to that yet, but Kauffman suggested that could change.
“Although delinquency rates have remained low, it is important to note that many lenders have indicated that the strong incomes of previous years, combined with low interest rates, have kept loan performance strong during the recent downturn,” he said. “However, significant working capital deterioration in 2015 has placed many borrowers in a more precarious financial position this year. If the current environment of low farm income persists through 2016, lenders generally expect to see loan performance deteriorate through the year.”