OMAHA (DTN) -- Farmers and ag lenders relying on Farm Service Agency direct loans or guarantees could see those loans delayed this summer as demand is quickly draining available funds.
Several ag groups are sending a letter Thursday to members of the House and Senate appropriations committees highlighting the escalating demand for these loan programs and pointing out the USDA's Farm Service is expected run out of funds later this month for direct operating loans and guaranteed operating loans. Roughly $650 million in potential farmer loans could be delayed.
"This substantial shortfall will leave many beginning farmers and others who cannot be fully serviced by commercial credit under current price conditions without the loans they need to stay in business," the letter states.
Additionally, there will be a backlog and waiting list for the same kind of loans and loan guarantees for FSA's 2017 fiscal year.
Increasingly farmers are turning to FSA for loans and ag lenders are turning to the agency to guarantee loans. An FSA spokesman told DTN the agency has seen 23% more applications for operating loans this year. Funding obligations for those loans are also up 19% from last year. Additionally, demand for FSA guaranteed real estate loans is up 27%.
"There's a higher demand now for guaranteed loans because of the low commodity prices," said Mark Scanlan, senior vice president for agriculture and rural policy at The Independent Community Bankers of America. "There has been a demand for a greater amount of operating loans and banks are relying more heavily on those loans because of the commodity prices."
While loan guarantees and direct loans were often considered reserved for beginning farmers or smaller producers, more ag lenders are seeking guarantees on loans with commercial farmers. Other farmers are increasingly turning to FSA for direct operating loans as well. The main problem is that more farmers are struggling to cash flow their operations.
Doug Stark, president and CEO of Farm Credit Services of America, told DTN last week in an interview that one of the biggest challenges facing farmers in the current market cycle isn't as much an issue of debt-to-equity, but working capital.
"Leverage and interest rates aren't the issue in this cycle, it's cash flow with the cost of production and the price of commodities," Stark said.
FSA was funded at $1.25 billion for direct operating loans for the 2016 fiscal year. As of the end of May it has used $1.12 billion for 19,335 loans, leaving the agency with just under $129 million for any new loans.
For guaranteed operating loans, FSA essentially gives lenders a guarantee that up to 95% of principal and interest will be backed by USDA. Congress approved $1.395 billion, of which the agency has guaranteed loans up to $1.329 billion, leaving about $66.9 million to use.
FSA was budgeted $2 billion for guaranteed farm ownership (real estate) loans, and has funded $1.67 billion thus far.
Loan availability may differ from state to state. FSA grants each state an allocation so one state may use its loan authority quicker than other states and run out.
USDA does have an emergency funding lever to pull, with authority to add up to 25% for FSA loan programs if demand outstrips appropriations. USDA has used that authority the past two years, but not for the full amount possible. If that authority is used again this summer, it's likely nearly all of it will be used as credit.
If loan demand reaches the point USDA is forced to stop or delay funding loans, farmers could wait until the new funding year begins Oct. 1. The delay could go longer depending on complications with congressional appropriation bills.
"The way a lot of the banks would handle it is they wouldn't make the loans until the funds are available," Scanlan said. "What typically happens is these loan applications are in the system in the order they are submitted to USDA, but they still don't have funding so the banker is not going to do the loan until that happens."
In some cases a bank may do a bridge loan, but that's not common.
If USDA uses 2017 funds to cover 2016 loan obligations and backlog, the fund shortage would carry over into the next fiscal year.
"If and when the appropriations bill gets done they will start funding those before they get to all the new applications for the next operation season," said Ferd Hoefner, policy director for the National Sustainable Agriculture Coalition. "Predictably they will run out of funds even faster next year."
So ag groups and lenders are trying to make the case to members of the House and Senate Appropriations Committees to increase FSA's budget authority for loans that would build in the ability to avoid another potential shortfall next summer.
"Even then we might be in the same situation next year, but we will have dealt with the immediate crisis and they won't run out so quickly," Hoefner said.
It would take roughly $16.5 million in increased budget authority to give USDA the ability to increase combined direct and guaranteed loan program levels by as much as $650 million, Hoefner explained. "So from a bang-for-the-buck point of view, if they can squeeze out that extra appropriated dollars somehow they will solve a lot of problems," he said. "We think they could solve what will be a really tight credit pinch if they could just come up with this money now," Hoefner said.
Hoefner added that the increase in loan authority for USDA would also ensure the loan programs still have funds to cover loans and guarantees for those underserved producers. "Our concern is the direct loans that are overwhelmingly targeted for beginning, veteran farmers and others get the short end of the stick because as everybody moves down a notch they get pushed out altogether. We want to prevent that."
The letter going out to congressional appropriators Thursday is signed by the American Bankers Association, Farm Credit Council, Independent Community Bankers of America, National Association of Credit Specialists, National Farmers Union, National Sustainable Agriculture Coalition, National Young Farmers Coalition and Opportunity Finance Network.
Chris Clayton can be reached at Chris.Clayton@dtn.com.
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