Farm Banks Become 'Fixers'

Stress Fractures Strain Ag Finances

At First Dakota Bank in Yankton, South Dakota, only 63% of farm borrowers showed a profit last year (earned net worth, blue line). Worse, only 65% showed a positive level of working capital (green line), so 35% would not qualify for 2016 loans without bank "fixes." (Chart courtesy First Dakota Bank)

WASHINGTON (DTN) -- USDA officials tried to accentuate the positives, but farmers, farm lenders and economists attending last week's USDA Outlook Forum could find little comfort in the department's grim forecasts for the year ahead. Almost everyone had been anticipating 2016 would offer a small recovery from their 2015 wounds. Instead, USDA forecast price downturns of $4.20 per bushel wheat, $3.45 per bushel corn and $8.50 per bushel soybeans for 2016 season-average prices.

While not a crisis yet, if such prices materialize over the next 18 months, farm lenders and bank regulators tell DTN they are bracing for possibly severe financial conditions a year from now.

"There's nothing I can plant that will make money this year," said a discouraged Keith Miller, a producer from Great Bend, Kansas. He's intending to summer fallow some acres and conserve moisture rather than take that risk. That would probably contribute to some of the 2.5 million fewer acres USDA says farmers will plant on the major crops this year, compared to 2015.

A snapshot of the loan portfolio at the First Dakota National Bank reveals more about the state of U.S. agriculture's union than any charts from USDA forecasts. First Dakota, based in Yankton, South Dakota, serves clients in South Dakota, Nebraska, the Front Range in Colorado and parts of Kansas and Wyoming. Many grain customers also had cattle that propped up their finances in 2014, but feedlot losses escalated in the fourth quarter of 2015, said Nate Franzen, president of First Dakota's agribusiness group.


Although he's only halfway through loan renewal season, Franzen told Forum attendees that just 63% of his clients showed a net profit last year, the worst performance in the 13 years he's kept records. Most troubling is that 35% of his clients showed negative working capital levels at year end, requiring "fixes" by the bank before they'd qualify for renewal. Those repairs can include restructuring debt, such as mortgaging land or refinancing machinery that might have been paid in cash in better days. Franzen is also doing a bang-up business signing up clients for Farm Service Agency guaranteed loans. He's encouraging growers to take action now, while land markets are still holding up farm equity.

Only half of First Dakota's loan portfolio has more than 15% working capital levels, a bare minimum given 2016 could drain those reserves further. Finance experts like Virginia Tech economist Dave Kohl typically recommend 30% or more, depending on the enterprise, Franzen said.

The sky isn't falling yet, but the future is concerning, he added. "Some clients have had one or two years of losses. The outlook isn't rosy for them, because the more years in a row they experience losses, the harder it will be to get a loan," Franzen said. "We're using every tool to help farmers get through this now, but unless markets turn around, we won't be able to help them all."

He worries most about young operators, some with exceptional management skills, but who haven't been in the business long enough to benefit from land appreciation or decades of earned equity. Without parents or grandparents as backstops, a number of them won't meet loan criteria.

"Some good young managers will go out simply because they don't have the financial horsepower the older generation does," Franzen said.

The news also discouraged Wells Fargo economist Michael Swanson. Lenders are stepping up maintenance and oversight of loans, including the number of farm loans their watch lists, Swanson told DTN. If markets worsen this year, as USDA now expects given normal weather, the question will be how long growers can hold out with the working capital they have on hand.

USDA often uses low debt-to-asset ratios to demonstrate agriculture's well-being, but Swanson said that was the wrong metric. "It's liquidity, not debt levels, that is the key," he said.

Swanson believes farm operators need to start using "market judo" to negotiate with their landowners and suppliers. Too many feared offending their landlords or vendors earlier this winter, he said. DTN's own 360 Poll of more than 500 operators in January found nearly half had seen no change in their average cash rent since 2013. Another 11% were down less than 5%. Midwest land-grant university economists had been penciling in at least $50 or more cuts in average 2016 rent, as a down payment on the $100 or more savings growers needed to achieve to breakeven. It appears that savings might not have happened in time for the March 1 rent payments.

"If you refuse to walk away [from a money losing deal] you don't retain the leverage to change," Swanson said. "Those who lose the least amount of money in this cycle will be the ones positioned for the rebound. It's not a fun thing to say, but that's preservation."

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