Farms on the Margins

Figures raise questions as to whether ag debt is on cruise control.

Farm Service Agency, which used to be considered the lender of last resort, has seen its rate of delinquent borrowers rise from 16.97 percent in 2013 (the height of farm income) to 19.41 percent now. (Progressive Farmer image by Gregg Hillyer)

Iowa attorney Joe Peiffer spent the latter half of February helping some of his clients try to restructure debt and get operating loans for 2019 after these farmers found out their past lenders weren't going to continue financing them.


At the well-known farmer support organization, Farm Aid, officials have added staffers for the group's hotline, which has seen a doubling in crisis call volumes.


Peiffer and others see more distressed farmers looking for help even as broader debt indicators show a farm economy, while certainly down from levels five to 10 years ago, not in crisis, statistically speaking. Overall, farm loan delinquency rates at banks remain around 2%, according to Federal Reserve and FDIC numbers. Reports filed at the end of last year by Farm Credit lenders show the number of loans in bankruptcy or foreclosure amount to 1.35% of total loans made by Farm Credit associations. With $194.5 billion loaned out at the end of last year, the dollar figure of nonaccrual loans was $1.3 billion, or just 0.66% of total loan dollars.


Farm Service Agency, at one time considered the lender of last resort, has seen its rate of delinquent borrowers rise from 16.97% in 2013 (the height of farm income) to 19.41%. The agency's 2018 direct-loan volume is up $3.24 billion, to $11.25 billion since 2013. Delinquent loan debt has gone up $147.9 million during that same period. The percentage of loan dollars delinquent is 5.75%, which is still lower than in 2013.

SHORING UP DEFENSES


Peiffer says he is spending more time with farmers trying to get their liabilities below the Chapter 12 bankruptcy limit of $4,153,150. He believes the debt limit for Chapter 12 needs to be raised. "There are a lot of farmers, even when not talking about lease debt, who are over the top," Peiffer says. "While Chapter 12 is a wonderful chapter for bankruptcy, many people who aren't necessarily farming that many acres can't qualify for it because their debts are too high."


Financial stress is likely to get worse for those farmers caught up in the stress of this spring's widespread flooding.


Jennifer Fahy, communications director for Farm Aid, says the USDA and ag economists often point to numbers that are much rosier than the reality of what their group is hearing from farmers. The group has had a hotline since the organization was created in 1985.


Throughout most of Farm Aid's existence, the hotline operated with one staffer and was more of a "how-to" resource, answering questions about converting to organic production, marketing directly to consumers and through farmers' markets, or helping people wanting to become farmers. During the past couple of years, however, the hotline has added two staff members and is dealing more with crisis calls, Fahy reports.


"Now, we are going back to those times of the '80s," she says. "We have seen more than a 100% increase in the hotline volume."


Forrest Buhler, an attorney at Kansas Agricultural Mediation Services, run through Kansas State Extension, says caseload there has doubled since 2015. The number of referrals the group makes to individual farm analysts has doubled, as well.


"We're seeing some very difficult situations because of the economy and the way things are," Buhler says. "That has become kind of chronic since about 2015, when net farm income kind of dropped precipitously ... and hasn't really come back to its full, robust self like it had been in 2014. It's been a steady flow and seemingly more difficult cases in that respect."

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FARMLAND TURNDOWN


Agricultural economy experts have often pointed to the strength of farmland values throughout this economic downturn as a saving grace, but land values too have shown signs of softening in key farm states.


Nebraska agricultural land values, before widespread spring flooding, had declined 3% from year-ago levels, according to preliminary results from the University of Nebraska-Lincoln Farm Real Estate Market Survey. The statewide average is $2,650 per acre. That's nearly a 20% drop since the peak in 2014 of $3,315 per acre. Rental rates are also down, including a 10% drop in center-pivot-irrigated cropland rates in northern Nebraska.


Iowa farmland values also fell--2.7% year to year. This is based on a report from the Iowa Chapter of the Realtors Land Institute. The average farmland value statewide was $6,794 an acre, a 17% drop since 2013.


Tom Jensen, senior vice president of lending, First National Bank of Omaha, says the number of problem loans is ticking up, but a lot of good decisions in recent years help more farmers hold their heads above water.


"While land values are off their peaks, they haven't taken large drops, at least in our area. But, the big help is that interest rates continue to be reasonable. Farmers are having losses, but the effects of that don't compare to loans at 5 to 6% versus (in the 1980s) when they were in the teens and up to 20%."


He adds bankers capped loans on land back when acreage was being bought at a fast rate.


"There was a lot of ground in Nebraska selling for $10,000 an acre, for example, and we were capping loans on that at $5,000," he says. That forced growers to start ownership of that land with a higher equity situation than the industry saw in previous land-buying sprees.


Another challenge to the U.S. farm economy is just how much global competitors have hit their strides in recent years.


"We are looking at tremendously rising supplies," says Chad Hart, an associate professor of economics and crop markets specialist at Iowa State University. "Agriculture globally has just been on an incredible productivity run over the past several years. That has helped pull things along, but it also means prices can't improve that much because there is just so much supply hanging in the market." The on-going trade dispute with China has also been a drag on commodity prices.


Hart says one reason delinquencies aren't higher is banks have done their work and made sure not to loan out to operations seen as substantial risks. "Instead of letting that farmer go delinquent, they are cutting that farmer off before they offer that next loan," Hart says. That leads to farmers having to either liquidate assets or give up portions of rented land, as Peiffer has seen in Iowa.


Lower farm incomes have eroded the overall balance sheets, but they have disappeared from the rolls that normally gauge whether farmers are in trouble. Farmers struggling financially aren't showing up in the delinquencies or bankruptcies yet, but they are looking at alternative lines of credit as a way to get by.


"They are looking for ways to get by, even if that means going outside the traditional boundaries of what we would consider ag finance," Hart says.


Iowa is seeing an increase in calls to its hotline, but crop farmers have been able to push through the low prices with higher production.


"For the most part, over the past few years, we have seen yields high enough that farmers have busheled their way through some of these financial issues," Hart says. "While things haven't been great, they also haven't been extremely bad, either. Farmers who were just getting by in 2016 have continued to get by in 2017 and 2018."


Jensen, at First National of Omaha, agrees that relatively strong land prices have helped prop up the farm economy. He also credits farmers being more proactive in their financial and marketing dealings rather than staying silent until they're past the point of no return. "We've been hiring more CPAs and attorneys with expertise in financial and succession planning. We're spending a lot more time advising families on those business and family plans rather than simply being a lender." The same efforts that help pass on successful operations can give early warnings of troubles ahead.

RESTRUCTURING RESTRICTED


A common move is to restructure operating loans into longer-term debt. "Sometimes restructuring is OK," says Shan Hanes, president and CEO of Heartland Tri-State Bank, in Elkhart, Kansas. Restructuring can put cash back into an operation, but he says regulators are scrutinizing refinancing. Without pointing to a specific regulator, Hanes says the pressure is on banks to minimize restructuring farmers who struggled to cover their operating loans or are losing equity in the operation. Regulators need to realize the tactic doesn't necessarily hurt the farm operation because interest on an operating loan is probably a higher rate than banks can offer real estate. "By restructuring, we're helping the producer on interest rate expense and liquidity," he adds.


In his history, Hanes says when farmers get short on cash, they start making short-term decisions and may reduce expenses such as fertilizer applications or chemical application that could increase revenue with higher production.


Hanes indicates bank regulators are looking at farm loans, declaring them bad and requiring foreclosure rather than giving the farmers and banker more flexibility. The ruling is, "'Hey, you've got a bad loan here, and you should have foreclosed.' The guy has got equity; the guy has performed. The guy has got positive net worth. The guy is still at a long-term farm operator in the right direction. We just happened to land on a year the cash was not as good. Restructuring makes sense," Hanes argues.


For other farmers, restructuring is no longer an option, explains Buhler, with Kansas Ag Mediation Services. He is increasingly seeing farmers who have restructured carryover debt or delinquent debt against assets such as farmland. Once debt begins to exceed the value of assets, the decision is usually swift. "That makes it almost impossible sometimes to go to a lender and find a way to restructure if you have a negative net worth like that."

CALLS FOR HELP


When lenders say no, farmers often call Farm Aid offices for legal services, financial counseling or emotional support. Usually, those three issues are heavily intertwined. "Typically, if a farmer is calling related to an emotional crisis, it's related to financial or legal concerns," Fahy says. "What we've seen in the doubling of calls is also an increase in the severity of calls that are coming in such that we are seeing calls from farmers who are in dire straits--some of them considering suicide."


For farmers facing no available cash, Farm Aid has some emergency grants to needs such as buying food, paying for emergency medical expenses or keeping the power on. Most of the calls come from established farms, but they involve all kinds of commodities--crops, vegetables and livestock. "It's really hard, and the calls are coming from farmers of all kinds," Fahy says.


Buhler says he has been doing this work for 30 years, but it is tough to insulate himself when a farmer is crying on the other end of the line, "or a farm family is worried about feeding their kids. It is that type of thing where the stress is real, and people are affected; and that's what sometimes is glossed over by the big picture people are trying to take of this thing," he says. "It may be a cycle, but nonetheless, people are trying to make a living out here."

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