DTN's Top 10 Ag News Stories of 2017

Numbers 9 and 8: RFS Fights, Credit Crunch

(DTN photo illustration by Nick Scalise)

OMAHA (DTN) -- Each year, DTN publishes our choices for the top 10 ag news stories of the year. In this story, we continue counting down, beginning with No. 9 that focuses on the battle over the Renewable Fuel Standard, then No. 8 sees how the credit crunch is creeping up on farmers.

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No. 9 RFS: Ethanol Faces RFS Fights, Growing Exports

DTN's No. 9 top ag news story of 2017 was the battle -- and controversy -- surrounding the future of the Renewable Fuel Standard and its impact on ethanol production.

By Todd Neeley
DTN Staff Reporter

OMAHA (DTN) -- When Donald Trump was elected president, much of his support came from ethanol-producing states where corn is king. The big question for biofuels interests entering 2017 was whether the new administration would keep its promises by supporting the Renewable Fuel Standard.

That support was questioned early on, when Trump selected Scott Pruitt to head the U.S. Environmental Protection Agency. As Oklahoma's attorney general, Pruitt led multi-state lawsuits against the agency, was a supporter of the oil industry and an outspoken critic of the ethanol industry.

Early in 2017, a report surfaced that the Trump administration was considering an executive order to make major changes to the RFS, including changing the point of obligation from refiners and importers to blenders.

Initial reports were that Carl Icahn -- energy billionaire, ethanol critic, and Trump adviser at the time -- helped the White House draft an order and was making deals with at least one ethanol interest group to allow the year-round sale of E15 in exchange for changing the point of obligation. However, such an order was never issued.

Icahn's energy companies reportedly financially benefitted from a drop in prices for renewable identification numbers, or RINs. (RINs are biofuels credits bought and sold by gasoline blenders to comply with the RFS.) Democratic members of Congress called for an investigation into whether Icahn had a role in federal policymaking.

In September 2017, the EPA wanted to further reduce the renewable volume blend requirements for advanced biofuels, biomass-based diesel volumes for 2018 and 2019, and the total renewable fuel volumes in the RFS. The proposed cuts would have been in addition to the agency's proposal to cut those volumes already.

The announcement was met with shock and anger from renewable fuels groups and U.S. Sen. Charles Grassley, R-Iowa. Biofuel and agriculture interest groups had already opposed the agency's proposed cuts to the RFS.

After a number of Midwest lawmakers and biofuels interests pressed Pruitt for answers that resulted in a variety of meetings with the president to remind him of his support for biofuels, Pruitt then backed off the proposed changes. There were very few changes to the final RFS volumes.

To close the year, Sen. Ted Cruz, R-Texas, announced he was holding up Bill Northey's nomination to a key USDA post unless the Trump administration agreed to meet with Cruz and senators from other oil-producing states to discuss changes to the RFS. As a result of that meeting, Cruz proposed placing a cap on RIN prices to help control RFS costs for obligated parties.

Cruz made a proposal to the White House to cap the RIN price at 10 cents each. In comparison, the D6 RIN was trading at 71 cents on Dec. 15, after falling from an opening price of 74.5 cents. RIN prices had been falling since hitting $1.09 in late October.

Late in the fall, Renewable Fuels Association President and CEO Bob Dinneen stressed in a statement that a cap isn't necessary.

"Numerous analyses, including those recently conducted by Wells Fargo, Harvard University, MIT, the University of Michigan, Iowa State University, and other institutions, show that merchant refiners recoup their RIN costs through higher refining margins, while retail gasoline prices are unaffected by RINs," Dinneen said.

Todd Neeley can be reached at todd.neeley@dtn.com

Follow him on Twitter @toddneeleyDTN

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No. 8: Credit Crunch Creeping Up

DTN's No. 8 top ag news story of 2017 centers on the financial pressures some farmers are facing, and how farm lenders responded in 2017 -- as well as what they predict will happen in 2018.

By Elizabeth Williams
DTN Special Correspondent

INDIANOLA, Iowa (DTN) -- Stress fractures in the farm credit area are starting to inflict some pain.

More than half of the agricultural bankers surveyed in October by the Chicago Federal Reserve expect more forced sales or liquidations of farm assets among financially distressed farmers in the next three to six months relative to a year earlier.

One Minnesota agricultural financial consultant told DTN that three of his clients said their lenders were not going to finance their operation in the coming year.

Thirty percent of the bankers surveyed by the Kansas City Federal Reserve stated that they had more than 10% of their loans in the "watch" category -- closely monitoring for financial deterioration. In addition, the number of bankers in that district who had more than 10% of their loans "classified" (for example, with inadequate debt service or insolvent collateral) doubled from a year ago to around 18% of the surveyed bankers.

Farmers are struggling after four years of lower commodity prices. Repayment rates for non-real-estate farm loans have declined compared to last year, reported bankers in the Chicago and Kansas City Federal Reserve districts. This comes at a time when the surveyed bankers also noted their availability of funds was down relative to a year ago -- the first time in 11 years in the Chicago Fed district, while demand for operating money and loan renewals and extensions continue to increase.

The good news/bad news for ag credit is farmland values are steady to slightly higher. That has kept farmers' and ranchers' balance sheets relatively strong and has also given lenders an opportunity to collateralize weaker loans. In the Chicago Federal Reserve district, collateral requirements for loans in the third quarter of 2017 tightened compared to the third quarter of 2016, as 22% of the respondents noted that their banks required more collateral and none noted that their banks required less.

Agricultural economists suggest we are at the point in the ag cycle that farm families will tap land equity to get operating funds from lenders. "I am working with a farm family right now where Dad will mortgage 80 acres to pump money into his son's operation to get an operating loan," said Mark Nowak, with Nowak Ag Consulting in Wells, Minnesota. Fortunately, "there is a lot of land equity in the Corn Belt to tap," he added.

The bad news of higher land values is it makes it difficult to argue for lower cash rents, which contribute to farm operators' expenses outpacing revenue, adding to producers' credit woes.

Ag lenders are pushing for lower cash rents. "In 2006, cash rents were 90 cents per bushel corn yield (per acre)," noted Nowak. For example, on ground that produces 200-bushel-per-acre corn, cash rent would be $180 per acre. He said rents peaked in 2012 at $1.60 per bushel corn yield per acre ($320 per acre rent on 200 bpa corn ground). Currently, cash rents have backed down to $1.29 ($258 per acre for 200 bpa corn yield ground).

"However, the industry needs to get back down to 90 cents (per bushel corn yield per acre) or less, with $3 corn. Landowners beware," Nowak said.

In Iowa, land values went up an average 2% in 2017 after declining the previous three years. In a survey conducted by Iowa State University on Nov. 1, the statewide average for high-quality farmland was $8,933 per acre, up 2% from 2016; medium-quality land averaged $6,849, up 2.2%, while low-quality farmland averaged $4,689, a slight increase of 0.5% compared to last year.

The strength in the land market was attributed to low interest rates, limited land for sale and good yields. As of Oct. 1, 2017, the Chicago Federal Reserve district's average interest rates on new operating loans and farm real estate loans had edged down to 5.16% and 4.84%, respectively; at 5.25%, the average interest rate on new feeder cattle loans had not changed.

Also supporting the ag credit market is an increase in the volume of operating loans and loans guaranteed by the Farm Service Agency (FSA) of USDA. FSA's guaranteed loan programs have "absolutely been a saving grace for rural banks and young farmers," said Rob Keil, senior vice president and chief credit officer with Dacotah Bank in Aberdeen, South Dakota. The secondary market of Farmer Mac has also helped agricultural lenders reduce risk in these tough times.

With the liquidity of lenders ebbing, as seen in rising loan-to-deposit ratios, banks may increasingly need to use FSA guarantees or turn away troubled borrowers, concluded the Chicago Federal Reserve's quarterly Ag Letter.

However, the Iowa land survey also showed there are still farmers in good financial shape, as 72% of the 2017 Iowa farmland buyers were existing farmers. Consultant Dave Kohl, professor emeritus of ag economics at Virginia Tech, told ag bankers at their annual conference to not forget about the top 40% of producers who are still making money and are positioned for opportunities.

Yet, farm and ranch loans will be increasingly put under the microscope. "We're watching our loans carefully," explained Keil. He adds that loan officers are working closely with farm borrowers to cut expenses to the bone and to keep track of where every penny is going.

Ag lenders learned from the 1980s to keep ahead of the curve and spot trouble before it leads to a problem loan. And, if the cash flow isn't there, it's better to let the producer exit his operation while he still has equity. No one is predicting another 1980s crisis -- today, interest rates are manageable, land values are steady and most farmers are not over-leveraged. But, with the dismal outlook for commodity prices in the near future, there will be some producers denied credit this winter.

Elizabeth Williams can be reached at elizabeth.williams@dtn.com

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Editor's Note: You can find Numbers 10 and 9 in DTN's top 10 list in today's top stories.

Check Dec. 27 for No. 7, 6 and 5 in our top 10 list.

(ES/GH/AG)