WASHINGTON, May 18, 2016 - Federal Reserve officials and agricultural lending institutions paint a deteriorating picture of the farm economy, but the situation depends on where you farm and what your operation produces.
In its quarterly survey of agricultural credit conditions, the Kansas City Fed says farm debt in its seven-state territory in the middle of the country continued to increase. Almost all banks in the 10th District reported a decline in farm income in the first quarter. Nationally, USDA is forecasting a whopping drop in farm income for the third straight year, to $54.8 billion, down more than half from its recent high in 2013 ($123.3 billion).
Tenth District bankers said poor cash flow prevented many borrowers from paying off loans from 2015, causing them to carry outstanding debt into the first quarter. Moreover, more than 18 percent of loans made in the first quarter involved restructuring existing debt to meet short-term liquidity needs. To lessen borrowers’ exposure to risk in these conditions, bankers in the district raised collateral requirements and increased their use of government guaranteed loan programs.
“The ongoing decline in farm income remained the primary driver of weakening credit conditions and modified loan terms,” the bank said in its report. “In the first quarter, 86 percent of survey respondents reported a drop in farm income from a year ago. Capital spending softened alongside the declines in farm income, and more bankers also cited lower household spending. In fact, 50 percent of bankers indicated that household spending fell in the first quarter, up sharply from 25 percent a year ago. More than half of bankers surveyed expected farm income, capital spending and household spending all would decline in the next three months.”
The bank also reported that nonirrigated and irrigated cropland values, as well as cash rents, continued to moderate. Looking forward, about half of district bankers indicated they expect further declines in farmland values. Some 213 agricultural banks responded to the survey. The district covers Colorado, Kansas, Oklahoma, Wyoming, and parts of New Mexico and Missouri. Agricultural banks are those with a greater percentage of ag loans in their loan portfolios than the national average of about 15 percent.
A quarterly survey by the Federal Reserve Bank of Chicago also found a significant decline in farmland values throughout the Seventh District, which covers Illinois, Indiana, Michigan, Wisconsin and Iowa. The 4 percent drop is the largest year-over-year decline since the third quarter of 2009, according to the report, which said it’s getting harder for farmers to sell land.
“Nearly two-thirds of the responding bankers expected farmland values to decrease during the second quarter of 2016, with the rest expecting farmland values to remain stable,” the report concluded.
The pain isn’t being felt equally, however. A Farm Credit Services of America (FCS America) report notes that while most producers suffered a loss from 2015 crops, in some cotton-producing regions, 100 percent of growers lost money.
Shawn Smeins, managing director for RaboAgriFinance, says that while most producers operated at a loss in 2015 – and expect a loss again this year – “grain and oilseed producers appear to be having the most difficult times as it relates to their liquidity and income statements.”
Looking at other sectors, Smeins says “swine seems to be performing the best with the largest profitable margins. Dairy is near breakeven to slightly positive margins. Cattle feedlots have appeared to cycle through their high price inventory and are looking at better margins with lower priced inventory of feeders and feed stuff.”
Bill Davis, chief credit officer for FCS America and Frontier Farm Credit, which serve Iowa, Nebraska, South Dakota, Wyoming and eastern Kansas, said grain producers in those states broke even or lost up to $100 an acre in 2015.
“Barring some unexpected event that improves the outlook for commodity prices, grain producers expect much the same in 2016, which will increase stress on balance sheets,” he said in an e-mail response to questions from Agri-Pulse. “Fortunately, balance sheets remain in relatively good shape and producers have time to identify financial solutions that position their operations for long-term success. Cost controls are the main issue going forward.”
The AgFirst Farm Credit Bank, which provides credit and financial services in the Mid-Atlantic and Southeastern states as well as Puerto Rico, says credit quality declined slightly in its district in the first quarter, compared to the fourth quarter of 2015, “due primarily to deteriorating asset quality in row crop production” linked to low commodity prices and weather-related events from South Carolina to Virginia during the harvest season. There has also been some decline in the dairy sector, it says.
The different reports point to a challenging future for U.S. farmers. However, as FCS America points out, farmers paid down debt in the boom years before farm income began to decline, and debt to asset ratios remain low relative to historical levels. This factor, combined with safety net features in the 2014 farm bill, should help the agricultural sector meet these challenges.
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