Washington Insider -- Friday

Reports of Worsening Farm Credit Squeeze

Here’s a quick monitor of Washington farm and trade policy issues from DTN’s well-placed observer.

Concerns Rising On U.S.-China Trade Talks

Events since the trade truce and resumption of trade talks between the U.S. and China are raising concern about the prospects for those talks.

China Commerce Minister Zhong Shan was listed as being on the telephone call Tuesday between U.S. and Chinese officials, but missing from the list was Commerce Vice Minister Wang Shouwen who has previously been involved.

China watcher Bill Bishop said he has “heard [Chinese leader] Xi does not like Wang, whereas Zhong worked with Xi in Zhejiang.” Bishop then said, “Or is this about concerns with Liu He?” Bishop’s Sinocism service noted this is the first time there has been a second official mentioned being in the talks with Liu.

The apparent reshuffling of the Chinese trade negotiating team is raising concern at the White House on the prospect for progress in the talks, according to the Washington Post, which noted that “Commerce Minister Zhong Shan, regarded by some White House officials as a hard-liner, has assumed new prominence in the talks.”

Meanwhile, the wait continues for China’s purchases of U.S. farm products that President Donald Trump said would take place – the only U.S. soybean sales to China announced in USDA Export Sales report for the week ended July 4 were net sales of 127,800 tonnes that reflected 140,000 tonnes of sales previously reported to unknown destinations and 12,000 tonnes of sales cancelled.

The New York Times reported China saw “large-scale purchases as contingent on progress toward a final trade deal that is still nowhere in sight.”

Plus, a Chinese government spokesperson said Wednesday that any plan to buy more U.S. farm goods still must be agreed on by both sides.

Reuters: Trump-Ordered Review on SREs Delaying Decisions

The request by President Donald Trump for a review of EPA plans regarding small refiner exemptions (SREs) under the Renewable Fuel Standard (RFS) is delaying decisions on those requests, according to sources quoted by Reuters.

The Department of Energy sent its scoring results of what were initially 40 requests for SREs for the 2018 compliance year in April, the report noted. However, since that took place, EPA data shows that two of those requests were either declared ineligible or were withdrawn, leaving 38 still pending.

The report indicated that a session could be held next week between Trump, USDA Secretary Sonny Perdue and EPA Administrator Andrew Wheeler, but the report also said the session may not take place.

Trump became involved in the situation when farmers in June complained to him about the SREs at an appearance he made in Iowa where he highlighted the administration’s decision to make sales of E15 fuel available year-round.

It is not clear how the situation will play out, but SREs have become a flashpoint between refiners and biofuel backers.

Washington Insider: Reports of Worsening Farm Credit Squeeze

Reuters is reporting this week that pressure is growing on credit availability across agriculture, especially from many big banks who had searched hard for new ways to expand their loan business beyond the troubled mortgage sector a decade or so ago. Many of the nation’s largest banks found new opportunities in the rural Midwest in the form of loans to U.S. farmers “who had plenty of income and collateral as prices for grain and farmland surged.”

Farm loan portfolios surged as Wall Street players piled into the sector. Total U.S. farm debt is on track to rise to $427 billion this year, up from an inflation-adjusted $317 billion a decade earlier and is approaching levels of the 1980s, Reuters said.

But now, after years of falling farm income and an intensifying U.S.-China trade war, JPMorgan, for example, and other Wall Street banks are heading for the exits. Reuters most recent analysis says the ag loan portfolios of the nation’s top 30 banks fell by $3.9 billion, to $18.3 billion, between their peak in December 2015 and March 2019, a 17.5% decline.

This “retreat” comes as shrinking cash flow is pushing some farmers to retire early and others to declare bankruptcy, the report says. It cites information from farm economists, legal experts, and a review of hundreds of lawsuits filed in federal and state courts.

Sales of many U.S. farm products, including soybeans, the nation’s most valuable agricultural export, have fallen sharply since China and Mexico last imposed new tariffs in retaliation for U.S. duties on their goods. The trade-war losses further strained an agricultural economy already reeling from years over global oversupply and low commodity prices.

Chapter 12 federal court filings, a type of bankruptcy protection largely for small farmers, increased from 361 filings in 2014 to 498 in 2018, according to federal court records.

“My phone is ringing constantly. It’s all farmers,” Minneapolis-St. Paul area bankruptcy attorney Barbara May said. “Their banks are calling in the loans and cutting them off.”

The decline in farm lending by the big banks has come despite ongoing growth in the farm-loan portfolios of the wider banking industry and in the government-sponsored Farm Credit System. But overall growth has slowed considerably — a trend banking experts call a sign that all lenders are growing more cautious about the sector.

The four-quarter growth rate for farm loans at all FDIC-insured banks, which supply about half of all farm credit, slowed from 6.4% in December 2015 to 3.9% in March 2019. Growth in holdings of comparable farm loans in the Farm Credit System has also slowed.

Many smaller, rural banks are more dependent on their farm lending portfolios than the national banks because they have few other options for lending in their communities. As farming towns have seen populations shrink, so have the number of businesses, said Curt Everson, president of the South Dakota Bankers Association.

Capital One Financial Corp’s farm-loan holdings at FDIC-insured units fell 33% between the end of 2015 and March 2019. U.S. Bancorp’s shrunk by 25%. The report describes similar trends for other bigger banks.

Reuters noted that many lenders appear to be avoiding mounting risks in a category that is not core to their business, said Curt Hudnutt, head of rural banking for Rabobank North America, a major farm lender and subsidiary of Dutch financial giant Rabobank Group.

In March of this year, FDIC-insured banks reported that 1.53% of their farm loans were at least 90 days past due or had stopped accruing interest because the lender has doubts it will be repaid. This so-called noncurrent rate had doubled from 0.74% at the end of 2015.

The noncurrent rates were far higher on the farm loans of some big wall street banks. Bank of America Corp’s noncurrent rate for farm loans at its FDIC-insured units has surged to 4.1% from 0.6% at the end of 2015. Meanwhile, the bank has cut the value of its farm-loan portfolio by about a quarter over the same period, from $3.32 billion to $2.47 billion Reuters said.

For PNC Financial Services, the noncurrent rate was nearly 6% as of the end of March. It cut its farm-loan portfolio to $278.4 million, down from $317.3 million at the end of 2015.

David Oppedahl, senior business economist for the Federal Reserve Bank of Chicago, said the banking community is increasingly aware of how many farmers are struggling. “They don’t want to be the ones caught holding bad loans,” he said.

The farm system is huge and has access to many types of resources, including many that are extremely sensitive to the politics of farmer distress. Still, for modern agriculture, credit is fundamentally important and its availability and cost should be both watched and analyzed carefully by producers as it responds to increasing market tensions, Washington Insider believes.

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