2016 Still Problematic

High Caution on Farm Loans

"Lenders are concerned we are drifting into some difficult economic times in agriculture," said Iowa banker Michael Hein. (DTN photo by Elizabeth Williams)

KANSAS CITY (DTN) -- Agricultural bankers are bracing for a wave of farm losses this harvest, but thanks to surprisingly high corn and soybean yields, the washout could be far less than some had predicted only a few months ago.

"Most bankers would describe this as a time of high caution," Michael Hein, chairman of the American Bankers Association ag bankers committee and vice president of Liberty Trust and Savings Bank, Durant, Iowa, told DTN. "We're certainly not in a panic mode, but these low corn prices are putting cash flow and profit pressure on some of our producers."

A record crowd of more than 800 farm lenders are attending the American Bankers Association's national agriculture conference here, up about 60% from recent years. Attendees are crammed into sessions discussing carryover debt, "burn rates" on working capital and lessons from the 1980s. Some experts estimated up to half of farm bank customers could be unable to fully repay current debt obligations this year and would need workouts for carryover debt before spring planting.

"We still don't think we're falling off the cliff," Hein said. "There's a number of troubled loans, but it's not like the 1980s yet."

However, Dave Kohl, a Virginia Tech economist, stressed that loan officers should scrutinize not just growers' liquidity levels, but the composition of their liquid assets. Grain held in inventory but unpriced could fluctuate in value, he noted, so may not deliver the cash necessary to repay debt obligations.

"Our industry can be brought to its knees when [borrowers] don't have the liquidity to meet those bills," he said. "You can have a [top-notch] 40% working capital ratio, but have a liquidity problem if it's composed of inventories and you haven't priced your grain."

Despite higher-than-expected 2015 yields in most of the Grain Belt, next year's finances look worrisome. Overhead costs on 2016 crops remain stubbornly high, Hein said, "and the outlook for revenue improvement at the moment looks pretty low."

Landowner-operators with untapped equity still possess options to refinance or even sell parcels to reduce debt loads, lenders said. Of biggest concern to Hein are operators with high percentages of cash-rented ground who typically pay a premium on cash rents.

"For renters, it's still a case-by-case situation, depending on how well they marketed and how much equity they had going into 2015," he said.

So far, government regulators continue to show historically low levels of problem loans, but this lag in reporting could just be "the calm before the storm," Hein added. "There were a fair number of producers who entered 2015 with strong working capital positions, but we're going to chip away at some of that this year," said Joe Kessie, senior vice president of Lake City Bank, Warsaw, Indiana. He described problems in his region as "pretty isolated and concentrated." Deluges of 20-30 inches during May and June decimated some crops, but overall his northern Indiana clients weathered the damage and will end the year much closer to break evens, he said.

"At the start of 2015, there was a lot of fear that $3.50 corn would cause issues," said Curt Covington, senior vice president of agricultural finance for Farmer Mac. Instead, bumper corn yields 30 to 40 bushels above normal in some cases are offsetting low prices.

"Some rural community banks will have problem loans -- there are always the outliers with too much leverage -- but by and large, 2015 is going to be OK," Covington said.

One bright spot is that land values have yet to reflect the commodity price collapse since 2013. "We're seeing a downturn, but they haven't crashed. So, for the moment, if you need to refinance, there's equity to tap. Potentially, carryover debt can be restructured to keep producers afloat," Hein said.

It pays to be proactive, however. "We will more likely stay with a higher-risk borrower who is making adjustments (living expenses, input costs, rental rates) than a lower-risk producer who is unwilling to make any changes until it is too late," noted Nate Franzen, president of the agribusiness division of First Dakota National Bank in Yankton, South Dakota.

Springfield, Minnesota, banker Daniel Olson had a client who refused to sell an 80-acre parcel to improve his financial situation two years ago. The bank even worked out a funding program later to keep him in business if he sold a tract of land. But the client preferred to file Chapter 12 bankruptcy.

"I recognize how hard it is to sell part of your farm, but sometimes that's the best option to keep your operation in business," said Olson.

Marcia Taylor can be reached at marcia.taylor@dtn.com

Follow Marcia Taylor on Twitter @MarciaZTaylor

(AG/SK)