Minding Ag's Business
Cash Rents a Culprit in Credit Defaults?
The first signs of financial stress are hitting the Farm Belt, as DTN's Elizabeth Williams reported this week (see "Credit Begins to Crack" on the Farm Business page http://goo.gl/…). Farm equipment dealers, bankruptcy attorneys and financial consultants are seeing an uptick in credit disputes, with much of the problem concentrated in fast-growing grain operations with more than 7,500 acres, her sources said.
In fact, agricultural bankruptcy attorney Joe Peiffer of Cedar Rapids, Iowa, told Elizabeth that four out of the last five farmers who sought his advice had accumulated more than $4.37 million in debt each, too large for them to qualify for special agricultural terms under the Chapter 12 bankruptcy reorganization.
Signs of distress have been growing, although the fissures aren't huge yet. In mid-March, DTN reported a flurry of last-minute cash rent auctions and rate renegotiations that knocked $100/acre off some higher-priced 2014 Iowa rents for the new operators. Obviously not all landowners with multi-year leases were sympathetic to their original tenants' pain: When a grower backed out of a three-year lease for $150,000/year, Peiffer reports the owner threatened to file suit for full-payment on years two and three. The landowner also wantsreimbursement for the $30,000 cut he shouldered this spring, when a substituterenter offered to pay only $120,000.
Contracts may be contracts, but one tenant told me this spring "some landowners seem more intent on breaking their renters than on bending."
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Ironically, agricultural loan data released by the Federal Reserve and the Farm Credit System Funding Corporation within the last week reflect little of this heartburn in farm country yet. In fact, overall loan quality for the Farm Credit system barely budged between 2015 vs. 2014.
Loans classified under the Farm Credit Administration’s Uniform Loan Classification System as“acceptable” were 98.0% at March 31, 2015 and 98.2% at December 31, 2014, the System's Funding Corporation reports. Loan delinquencies (accruing loans 30 days or more past due) as a percentage of accruing loans remained at a low level of 0.28% at March 31, 2015, as compared with 0.30% at March 31, 2014.
What to make of these confusing signs? Keep in mind that about half of all farm operators run virtually debt free, points out Texas A&M economist and DTN Farm Business Adviser Danny Klinefelter. Those who own their farms can outlast almost any cycle. Others have not suffered repeat weather disasters or shoulder carryover debt, so their cash reserves and liquidity may be more intact than those with low yields in 2013 and 2014. Some diversified livestock operators stockpiled cash last year and still sit on a virtual war chest.
Klinefelter makes a rough estimate that if commodity prices stay this low another year, perhaps 30% of the commercial farmers "won't necessarily be bankrupt, but could have real trouble getting financed in 2016."
The higher risk operations are concentrated among those commercial farms with over $500,000 annual sales who cash rent a high portion of their operations, Klinefelter adds. They may have multi-year cash rent commitments that "make no sense under current commodity prices" but deal with landlords reluctant to give concessions. They may be shouldering carry over debts from past years, something lenders like to refinance only occasionally.
Up to now at least, most heavily indebted grain operators could escape more gracefully than in the 1980s, thanks to land prices at more lofty levels. We've all heard stories of hard pressed farmers who scaled back their rental acres or equipment lines, or sold farmland to raise a little cash in 2014. Some proactively restructured their debt as early as last summer, perhaps financing some equipment they had initially paid in cash.
But it's time to prepare for hard negotiations on excessive 2016 rents or risk serious levels of farm failures a year from now. Just hope landowners recognize the seriousness of the situation.
Follow me on Twitter@MarciaZTaylor
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