AUSTIN, Texas (DTN) -- After a reversal of fortune for livestock and three years of tight or negative margins for grain, signs of farm financial stress are beginning to sprout across farm country. So far, even the experts admit they don't yet have a clear picture of the extent or severity of the problem.
USDA's November forecasts pegged 2015 farm incomes down 32% for grains, oilseeds and fiber sectors, 13% for cattle and 70% for dairy. Worsening cattle feeding losses in particular could be a worry rolling into 2016, farm accountants report, but firm results won't be known until loan renewal time. The Kansas City Federal Reserve surveys farm lenders about year-end credit conditions in February.
In the meantime, Idaho farmer and financial consultant Dick Wittman has already seen the shock of grain producers with accrual losses for 2015 crops yet owing IRS tax bills.
The reason is a hangover from the peak corn years, Wittman said. Frontloaded Section 179 write-offs on combines and grain bins the past seven years mean distorted incomes now. Operators must sell enough inventory to make debt payments but have no depreciation offsets on their taxable income, Wittman noted.
In Iowa, Dave Olsen's farm clients trimmed their prepaid expenses across the board for fertilizer and seed at year-end, but decreased their deferred grain contracts. Olsen, a financial adviser with AgriFamily Consulting in Mason City, Iowa, interprets this as a sign of 2015 income shortfalls.
"That's a quick measure of year-to-year profitability, and it's a sign that despite above-average yields, 2015 margins weren't there," Olsen said.
Many grain producers in north-central Iowa and southern Minnesota started to have accrual losses in 2014 and 2015, he added, "but if they use cash accounting, they're just beginning to see the damage."
Since average Midwest cash rents in the $250 to $300 range haven't yet adjusted much, crop margins will be tight for another year. "For a lot of people, whether they get financing for 2016 will depend where the banker plugs in projected prices. If it's $3.25 corn and $7.50 soybeans, versus maybe $3.75 and $8.50, it will make a big difference," he said.
Applications for the Farm Service Agency's guaranteed operating loan program soared 37% between fiscal 2014 and 2015, the agency told DTN. For the first quarter of 2016, which ended in December, operating loans jumped another 4% over the same period a year earlier and farm ownership loans 17%. FSA officials say other factors could be at play in the demand for government credit, such as a rush to lock in attractive rates before the Federal Reserve's December price increase.
However, Texas A&M economist Danny Klinefelter believes FSA loan demand indicates farm borrowers are shouldering more carryover debt, some for the second year in a row. Farm lenders need to be proactive about bolstering their own portfolios and transferring some of their risk with problem loans, he added. Regulators have imposed stricter rules in reaction to the 2008 financial crisis and don't have the same forbearance capacity that they had in decades past.
"Once regulators' hair goes up on their neck, rules get applied across the board," Klinefelter said. "They worry how things will shake out if there's another prolonged industrywide setback."
In a survey released Jan. 13, Farmer Mac, an agricultural mortgage lender, reported that more than half of lenders surveyed expect loan delinquencies to increase in the next six months. Nearly 60% also believe farm real estate markets will slip in 2016.
Farm balance sheets are under pressure heading into 2016, Farmer Mac added. "After two consecutive annual declines in farm income, some producers have been forced to liquidate financial assets and increase debt levels to compensate," Farm Mac said. The net result is the first national decline in farm equity since 2009.
Jackson Takach, a Farmer Mac economist and report co-author, believes lenders have been bracing for loan deterioration for more than a year, but problem loans will start to show after land payments and advance cash rents are due later this winter. "In the grain industry, prices are low and it's been hard for producers to hit break-evens if they rent half or more of their land," he said. "The higher the percentage of land cash rented, the more likely they won't be performing very well."
"What I'm most worried about is the spillover effects if 2016 is as bad as or worse than 2015," Klinefelter added. While no official statistics exist, he estimated that at least a third of the commercial farm loans on a volume basis in Texas probably involved some carryover debt.
"For a while livestock carried crop producers," Klinefelter said. "Now we just need something to pencil out in 2016."
Farmers and ranchers with tarnished credit quality in 2016 have time to be proactive, he added. Those who own land still have an opportunity to sell assets near all-time highs to get debt paid down or increase liquidity. He recommends that they develop concrete business plans before they meet for loan renewals.
"Be building your relationship with lenders who have strong ag backgrounds and share your strategy," Klinefelter said. "You may be a problem credit, but you don't have to be a hopeless cause."
Each year, DTN presents an outlook series on what is expected for the year ahead in various areas of agriculture. This is the 10th story in a series DTN is running that looks at what farmers can expect as the hot topics for 2016 in areas such as farm finance, land prices, ag and the environment, agricultural policy, crop inputs, livestock, transportation and others. We welcome your feedback on what you think the year will be like at email@example.com.
Marcia Zarley Taylor can be reached at firstname.lastname@example.org
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