Debt Mediators on Call

Make-or-Break Year for Low-Equity Farmers

Elizabeth Williams
By  Elizabeth Williams , DTN Special Correspondent
Nebraska hotline responder Michelle Soll (shown on land she farms with her husband, Mick) sees financial and emotional stress building, but not anywhere near 1980s levels. (Photo courtesy of Michelle Soll)

INDIANOLA, Iowa (DTN) -- State mediation services in Kansas, Nebraska and Iowa are reporting a jump in farm caseloads but more on the scale of a "stream" rather than a "flood."

Michelle Soll with Nebraska's Rural Response Hotline and Legal Aid said the past couple of months have seen an increase in financial distress calls from farmers. "Most of the calls have been from producers who say, 'I see the writing on the wall; something's got to change,' or banks have called and said, 'We have to figure out an alternative for this producer,'" said Soll.

Kansas Agricultural Mediation Service staff attorney Forrest Buhler reported in their mid-year summary that the number of cases they've had since October (when their fiscal year began) equals the number of cases they had for the entire previous fiscal year.

"We're starting to hear stress, fear and depression from farmers and ranchers," said Buhler. "Both producers and lenders are concerned. What we've seen is the lender will say, 'I would like to make this operating loan, but you [the producer] need to work with someone [financial counselor] on developing a plan that will cash flow so you can continue to operate,'" Buhler explained.

"We've seen a lot of carryover debt that wasn't able to be paid off last year, and that makes it difficult to operate this year," said Buhler. "There's not much left on the line of credit."

TROUBLED DEBT STILL SMALL

After the spring renewal season, roughly 90% to 95% of farm loans at commercial banks and Farm Credit System institutions are classified as acceptable, although "watch" lists are growing. Of greatest concern are heavily leveraged borrowers with debt-to-asset ratios of 70% or above, lenders say. So far, about 5% of U.S. crop producers fall in that category, and roughly 3.4% of livestock producers, USDA estimates.

Today's financial stress is especially hard on young or beginning farmers because they do not have enough equity to draw on, noted Soll. "We've had some renegotiation on rents and not-as-necessary equipment sales. Some farmers are trying to farm on a smaller scale. And we've had a couple of producers stop farming," said Soll. "They couldn't pencil it out and we're now putting an exit plan together to reduce their capital gains tax."

In Iowa, more than half of the mediation cases this winter and early spring have been over machinery notes. The drop in machinery values have affected borrowers on the bubble.

"Some of the deficiencies are huge," reported Stan Dearduff, regional coordinator of the Iowa Mediation Service. In one case, a borrower faced defaulting after making $450,000 in machinery payments. He would have owed an additional deficiency of $275,000 because of the drop in the value of the equipment.

"Another young man had a three-year lease on a large-horsepower tractor and had one payment left of $15,000, but wasn't sure he could pay it," Dearduff said. "However, if he let the tractor go back to the equipment manufacturer, he would have had a deficiency payment due of $64,000. So, his choice was pay the $15,000 now to complete the lease or have annual payments of $12,500 for the next five years to pay off the deficiency."

Dearduff had another case where the dad had co-signed the notes of a young farm couple. "They don't want to sell the machinery for tax reasons. Their bank is working with them to let them liquidate over five years. Then, they don't have to sell all the machinery in one year."

One concern of Dearduff is new underwriting standards by machinery companies. "Producers need to be aware of the consequences of cross-collateralization, or adding another name to your machinery lease or loan," he warned.

Last year, higher-than-normal corn and soybean yields bailed out many farmers in the main Corn Belt states. However, in Kansas, some areas of the state haven't had good yields for two, three or four years, reported Buhler. "We'll need some top yields now; just an average yield may not be enough this year to make up for low prices," he said.

"Every banker I've talked with said this has been an extremely stressful lending season," said Dearduff. He's heard reports from banks in eastern Iowa that 55% of borrowers are going to the field with a projected negative cash flow.

"I've done this [mediation] for 29 years. I deal with the bottom tier of borrowers. We are now crawling up a tier," said Dearduff. "We are nowhere near the situation of the 1980s, but if prices don't change and yields are average or below, the financial stress could get overwhelming for many producers."

If you know of someone feeling financial pressure who wants to know their options, this website lists the agriculture mediation services by state:

http://aces.nmsu.edu/…

(MZT/AG/CZ)

Elizabeth Williams