Another consecutive year of farm losses is beginning to worry Grain Belt farm lenders. Many thought liquid reserves accumulated during years of peak prices would help crop producers absorb multi-year losses now, but they may have underestimated the length and depth of this downturn.
No one has a precise handle on the scale of the difficulties, but by mid-year, about 22% of the borrowers in the Kansas City Federal Reserve district were experiencing repayment problems, although only 7% of those were severe.
A key issue is that much of the liquid wealth that farmers acquired during corn's boom years will be gone by year-end, some economists now predict. Without a strong financial buffer, some farm operators will need to make serious course corrections to qualify for financing in 2017. That could set the stage for more cost cutting, farmland sales and downsizings in the year ahead.
"Despite record yields, the national average revenue from the 2016 corn crop is estimated at just $552 per acre, or just 60% of the peak in 2011 and the lowest since 2006," Farm Credit Administration economists Steve Koenig and Dennis Shields wrote in an Aug. 31 report. "For many corn producers, crop revenue plus county Agriculture Risk Coverage (ARC) payments will not cover total production costs for the fourth year in a row." They expect the largest revenue losses might occur in states like Ohio and South Dakota, where subpar 2017 yields are expected.
If USDA estimates of a $3.15 per bu. season average cash price for corn materializes, the FCA economists believe about 88% of corn farms can cover their operating costs, but a mere 17% are able to cover total costs this season, including land.
The first item lenders monitor is how much working capital growers hold, in case they need to fund cash shortfalls from operations. Based on Illinois farm business records, University of Illinois economist Gary Schnitkey estimates in a recent farmdoc daily post that most of the extra working capital reserves his state's farmers built during high-income years from 2007 to 2013 will be depleted by year-end. That would make working capital levels comparable to the low income years of 1996 to 2006.
That's not a disaster, but it does make finances fragile for below-average operators. Earlier farmdoc posts show "In 2015 and 2016, [Illinois] working capital reserves were used to fund cash shortfalls coming from operations," Schnitkey reports. "If prices remain low through 2017, means other than reducing working capital likely will be needed to address cash shortfalls."
Evan Hahn, a senior agricultural analyst who covers large farm and agribusiness accounts for Farm Credit Mid-America in southwest Ohio, encourages borrowers to reach out to lenders early.
"I don’t think it's total gloom and doom, but don't wait until end of year or when you need funds to prepay things to talk with us," Hahn says. "Don't wait until next year and the beginning of the operating cycle and say here's how bad it was."
Farm Credit Mid-America's minimum working capital levels for full-time grain operations are 20% of gross revenue, so if an operator's normal sales are $1 million, they'd require $200,000 in working capital to meet financial standards.
It gets back to communication, and a talk about how another year or possibly two could erode a grower's position, Hahn says. "If they are just expected to lose a little, and they have a cost structure to be competitive and not lose money year-over-year, that will open up options to potentially rebalance the balance sheet."
What's different about this situation versus the 1980s is that growers are carrying much better equity and net worth positions, Hahn adds. With low, fixed interest rates still available, workouts are possible.
"I can't stress enough just to have communication with your lender," Hahn says. "We like to have conversations with borrowers early and often. And it needs to be open and honest both ways. Farmers need to be realistic about expectations of what they can do, and their lenders vice versa. Lenders need to be realistic about what the farmer can achieve in a given year's time."
For the Farm Credit Administration report go to http://www.fca.gov/…
For the University of Illinois report go to http://farmdocdaily.illinois.edu/…
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