Are We At The Bottom Yet?

In 2014, ag economists at the American Bankers Association’s annual agricultural conference told lenders to expect the downtrend in farm profits to last five years. We are in Year 4 of that prediction. Are we at the bottom yet?

Net farm profits for corn and soybean producers peaked in 2012, and receipts from those two crops have dropped about 50% from those highs. Between 1980 and 1986, corn prices also declined around 50%, but there was a lot more pain on the farm as net farm incomes plummeted.

What is propping up today’s farming operations?

FIVE-YEAR REVIEW. In 2013, you could still sell corn for $5 to $6 a bushel before harvest. Profits were lower than 2012 but still high. Most growers were not worried about farming another year.

In 2014, many operators heeded the words of farm advisers to accumulate working capital and drew on their cash savings from their high-profit years while trying to reduce costs as much as possible. Their savings and cost-cutting carried them through.

In 2015, lenders were busy restructuring balance sheets, offering longer-term loans on previously purchased equipment and land to free up cash. Farm Credit Services of America, based in Omaha, Nebraska, increased loan volume 28% from 2012 to 2015 and increased its loan volume another 7% in 2016. While this doesn’t improve profits, it can keep you in business.

Bumper corn crops from northern and central Illinois and Wisconsin westward through eastern Nebraska supported farms in 2016. Some counties in four of those states reported 30 bushels per acre above trend corn yields. The eastern Corn Belt didn’t have as good a corn crop but was aided with strong soybean yields in 2016.

Agricultural adviser Mark Nowak, Wells, Minnesota, notes his client harvested 225-bushel-per-acre corn, which was 30 bushels more than average. “At $3.50 per bushel, that extra 30 bushels equaled $100 per acre, and that was a lifesaver for one more year,” he says.

CURRENT MARKET. “It’s too early to tell if we’ll see some forced farm sales this winter,” Nowak says. But, he adds, there’s still plenty of equity to prop up agriculture. “Our local bank decided that no matter how high the market value of farmland, they were going to use $4,500 per acre as the value on the balance sheet. A loan officer calculated what a borrower’s net worth would be if they used the fair market value of $7,200 per acre.

“Having a low land value on the balance sheet gives the lender room for market fluctuation and helps avoid a quick, knee-jerk reaction to foreclose. A producer who needs to reduce his operation or get out of farming can sell on consignment and avoid a big public sale,” Nowak explains.

Farm Credit Services of America also restricted farm mortgages to a conservative book value (sometimes half the market value) when land prices skyrocketed in the new millennium.

Nowak was a loan officer during the 1980s. “What happened in the ’80s is land values dropped from $2,500 per acre to $750 per acre in four months, and the borrower may have owed $2,000 per acre on the ground. Banks had no choice but to foreclose. It was massive sale after massive sale.”

Another big difference is interest rates. They are much lower than they were in the 1980s, and crop insurance and revenue insurance provide better safety nets, Nebraska State Bank president Blake Howsden explains.

“I think we’re actually getting back to a more normal farm financial environment,” he adds. Howsden doesn’t foresee agriculture returning to 2012 profit levels again, barring a major world event or drought. “When prices went up, it gave people euphoria and really messed up their spending and cost control.”

MORE FORBEARANCE BY BANKS. Today, banks have several tools to help them reduce their risk in these tough times and not feel the pressure from regulators to clamp down on their reputable borrowers.

Farmer Mac is a secondary market for farm and ranch loans. Banks sell their loans to Farmer Mac but continue to service the loans they originate. Farmer Mac’s volume of outstanding business loans has increased 25% since 2014 ($14.6 billion in 2014 to $18.3 billion as of June 30, 2017).

USDA has expanded its loan-guarantee program where the banks originate and service the loan, but it guarantees the loan if it goes under. USDA has strict parameters on credit worthiness of the loans it will guarantee and has guaranteed more than 4,600 farm ownership loans totaling more than $2.2 billion (as of Sept. 20, 2017).

In addition, USDA has guaranteed more than 4,900 operating loans totaling over $1.3 billion. The guarantee loan volume in 2017 is slightly below 2016, but the number of operating loan applications actually increased (but the loan amounts trended lower).

In 2017, USDA observed an increase in requests for operating loan guarantees in the Midwest and a slight increase in guarantee requests for beginning farmers.

“There is still a lot of equity in farm country,” Nebraska banker Howsden explains. “But, you can only restructure loans and carry over your line of credit for so long. This winter, we could see an escalation of a reallocation of resources.”

If we’ve learned the lesson from the 1980s, the landing will continue to be soft before the cycle turns once again.

[PF_0218]

Copyright 2019 DTN/The Progressive Farmer. All rights reserved.