Ag's Credit Challenges

Many Farm Borrowers Took a 2015 Hit

Farm Credit System's nonaccrual loans inched upwards at year-end, but remain about one-tenth the 1990 level. (Chart courtesy Farm Credit Council)

HADDONFIELD, N.J. (DTN) -- In the contest for which commodity crop lost the most money last year, cotton may be a winner.

Midwest corn and soybean growers posted mediocre 2015 returns, but thanks to bumper yields, few losses were as catastrophic as in the Cotton Belt, Farm Credit lenders report. Those geographical differences accentuate why it's hard to generalize about crop agriculture's current financial health.

Jay Stewart is chief lending officer for Capital Farm Credit, the Farm Credit lender whose territory covers about 80% of Texas and serves 20,000 ag borrowers. He and other Farm Credit leaders briefed congressional and farm organization staffers last week about agriculture's deteriorating finances.

In a follow-up interview with DTN, Stewart cited below-par yields and quality issues as the reason most Texas cotton growers accumulated losses from $35 an acre to as much as $200 an acre, though some managed to barely break even. In some of Capital Farm Credit's lending territory, 100% of the farm operators lost money in 2015, he said.

"In the South Plains (Lubbock area) we saw typical losses in the range of $50 an acre to $125 an acre," Stewart said. Even in an area where crop-share rents helped buffer risk, "it appears that farmers who rent a majority of their farm ground suffered larger losses than those who own most of their land."

Texas cotton growers are entering 2016 with significant carryover balances they will need to repay over the next few years. Based on price projections for 2016 crops, "it will take a good yield for most producers to do anything but breakeven," Stewart said. "Due to heavy rains in the Texas Coastal Bend, they've already had to replant, so are even further behind."

The Farm Credit System believes it has the financial strength to help borrowers weather farm losses nationwide, with capital reserves at all of its institutions roughly two or three times the regulatory 7% minimum. So far, only 0.56% of Farm Credit System borrowers were classified as nonaccrual at year-end 2015, versus a 25-year high of over 5% in 1990.

Although the vast majority of Texas customers ultimately qualified for credit, many farm borrowers needed fixes to project a positive cash flow, Stewart added. "Our philosophy is to work with our borrowers to keep them farming by using whatever tools are available. That meant terming out carryover balances over longer periods, utilizing Farm Service Agency loan guarantees and subordinations, and, in a few cases, selling assets -- or a combination of all of the above."

What worries him most is that this is the second year in a row for negative returns for most Texas operators, a factor that is encouraging some young farmers to voluntarily quit and find off-farm jobs rather than continue to drain their equity, Stewart said.

"They look at the numbers where they are and where they'll be a year from now [given price projections and historic yields], and it's hard to project making a living from farming," Stewart said.


In contrast, credit conditions in the Midwest show evidence of stress in the grain and feedlot sector, but not a crisis. Growers have downsized their expectations, however: They no longer define success in this cycle as profit per acre, but as minimizing their losses.

"A majority of our customers broke even or lost $25 to $50 an acre in 2015, and consider that a win," said Bill Davis, chief credit officer for Omaha-based Farm Credit Services of America/Frontier Farm Credit. "Even $100 an acre loss [on corn] for 2015 isn't a bad outcome," given how fast commodity prices collapsed without a similar adjustment in production costs.

Davis monitors a portfolio of 57,000 borrowers from South Dakota, Wyoming, Nebraska, Iowa and eastern Kansas. Roughly 5% of FCS America's customer loans were adversely classified as of March 31, a slight deterioration from 2.5% at year-end 2015. Most ag borrowers have substantial assets and equity in real estate, so that gives them an opportunity to find solutions to temporary losses. For corn and soybean producers, a major objective is rebuilding liquid reserves -- working capital -- to the recommended $250 an acre.

Cost control is the main issue going forward. "Grain production agriculture needs to reconcile the reality of our current revenue stream -- $3.25 to $4.00 corn the likely trading range -- and nothing on the horizon to cause a new cycle," Davis said. "It is not likely 'price' will fix the problem. Cost reductions are the likely solution."

Midwest stress is concentrated among crop producers who rent a high percentage of their acres, he added. Paying excessive cash rents can make renters higher cost than owner operators, plus they have less equity in the event they need to restructure debts.

It was common for growers in FCS America's five-state region to knock $25 an acre off cash rents in 2016, with some achieving $50 an acre or higher adjustments, Davis said. "That's not enough to get fundamentals back in line, but growers might be more successful next season by just sharing their costs and being transparent about the earnings outlook. Time alone and more information should have some impact [with landlords]."

Barring some unexpected event that changes price outlook, Midwest lenders expect to continue to see widespread grain production losses in 2016 and stress levels creeping upward.

The good news is that most borrowers have accumulated financial reserves that will last through the current downturn, lenders said. Many Farm Credit institutions lent conservatively, requiring down payments of 50% or more on farmland purchases since 2008, even though they were allowed to finance up to 85% of the appraised value of real estate. Farm lenders -- both the Farm Credit System and country banks -- have spent much of the past 30 years rebuilding their finances as well, Davis said.

"We've prepared for this. We're in the best shape the Farm Credit System has ever been in. We're prepared to be patient and help customers work through the cycle," he said. "We can't save everyone, but if they have substantial assets and equity in real estate, we can help them find solutions."

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