Farms on the Margins

Debt Figures Raise Questions of Whether Farm Debt is on Cruise Control

Chris Clayton
By  Chris Clayton , DTN Ag Policy Editor
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Farm Service Agency, which used to be considered the lender of last resort, has seen its rate of delinquent borrowers rise from 16.97% in 2013 (the height of farm income) to 19.41% now. (DTN/Progressive Farmer photo by Gregg Hillyer; DTN photo illustration by Nick Scalise)

OMAHA (DTN) -- Iowa attorney Joe Peiffer spent the latter half of February helping some of his clients try to restructure debt and get operating loans for 2019 after these farmers found out their past lenders weren't going to continue financing them.

"Right now, we're having many people find out shortly before they have to pay rent that they aren't going to have financing," said Peiffer, who works with farmers in Iowa and Illinois.

Some of these farmers needed millions to pay rent. Peiffer said they didn't all get financing. Farmers who gave up rented ground run the risk of being sued for any shortfall landlords experience if they must lower rent to secure a new tenant.

At the well-known farmer support organization, Farm Aid, officials say they have added staffers for the group's hotline, which has seen a doubling in crisis call volumes.

Peiffer and others see more distressed farmers looking for help even as broader debt indicators show a farm economy, while certainly down from levels five to 10 years ago, not in crisis. Overall, farm loan delinquency rates at banks remain around 2%, according to Federal Reserve and FDIC numbers. Reports filed at the end of last year by Farm Credit lenders show the number of loans in bankruptcy or foreclosure amount to 1.35% of total loans made by Farm Credit associations. With $194.5 billion loaned out at the end of last year, the dollar figure of non-accrual loans was $1.3 billion, or just 0.66% of total loan dollars.

Farm Service Agency, which used to be considered the lender of last resort, has seen its rate of delinquent borrowers rise from 16.97% in 2013 (the height of farm income) to 19.41% now. The agency's 2018 direct loan volume is up $3.24 billion, to $11.25 billion since 2013. Delinquent loan debt has gone up $147.9 million during that same period. The percentage of loan dollars delinquent is 5.75%, which is lower than in 2013.


Some of the increased financial work is with farmers trying to head off a crisis. Peiffer is spending more time with farmers trying to get their liabilities below the Chapter 12 bankruptcy limit of $4,153,150. Peiffer and others, including Sens. Charles Grassley, R-Iowa, and Amy Klobuchar, D-Minn., believe the debt limit for Chapter 12 needs to be raised. "There are a lot of farmers, even when not talking about lease debt, who are over the top," Peiffer said.

"While Chapter 12 is a wonderful chapter for bankruptcy, many people who aren't necessarily farming that many acres can't qualify for it because their debts are too high.

"Right now, I'm in a spot where I'm hiring additional attorneys to help more farmers. I'm turning business away and I can't do it all," Peiffer said.

Financial stress is likely to get worse for many farmers caught up in the stress of flooding.

"USDA and ag economists point to numbers that are much rosier than reflect the reality we hear from farmers," said Jennifer Fahy, communication coordinator for Farm Aid.

Farm Aid has had a hotline since the organization was created in 1985. Throughout most of the group's existence, though, the hotline normally operated with one staffer. For much of its existence, the hotline operated more as a "how-to" resource, answering questions about converting to organic production, marketing directly to consumers and through farmers markets, or helping people wanting to become farmers. Over the past couple years, the hotline has added two staff members to deal more with crisis calls, Fahy told DTN.

"Now we are going back to those times of the '80s," Fahy said. "We have seen more than a 100% increase in the hotline volume."

Forrest Buhler, an attorney at Kansas Agricultural Mediation Services run through Kansas State Extension, said the caseload at that office has doubled since 2015. The number of referrals the group makes to individual farm analysts has doubled as well.

"We've had a big increase in the number of cases over the last few years and are seeing some very difficult situations because of the economy and the way things are," Buhler said. "That has become kind of chronic since about 2015 when net farm income kind of dropped precipitously at that point and hasn't really come back to its full robust self like it had been in 2014. It's been a steady flow and seemingly more difficult cases in that respect."

Farm Aid often refers farmers to Extension staff in their respective states or to private organizations who will send people to run financial programs with farmers and talk about options. Over time, though, resources have been chipped away. There are more than three dozen states in which Farm Aid doesn't have a direct contact or resource for farmers to turn to in their states.

Among the reasons Fahy said farmer are being turned away from loans is bankers telling farmers they need an off-farm job that offers health insurance to be financed.

The lack of good banking options has forced farmers to turn to credit-card debt as well. More farmers are charging their farm expenses to a credit card. Buhler recalls a farmer who had more than $120,000 in operating expenses charged on credit cards. "So if the lenders won't loan them money, they are having to go to other sources to try to finance their operations," he said. "So that's another red flag we have seen quite a bit of."

With lower commodity prices continuing and carryover debt piling up, it's becoming harder for farmers to find a production option for 2019 that will cash flow, Buhler said. "We're seeing a pretty serious situation, at least here in Kansas. We're obviously in a position where we're starting to see more liquidations. Creditors are saying, 'Debt has to come down, so we're going to have to have you liquidate some land or liquidate some machinery.' Things like this are happening just to get down to a basic level where they can see a way to cash flow the operation," Buhler said.

"We are hearing from farmers who have been denied operating loans and they may not have that foreclosure notice yet, or they may not be behind in those debts yet, but without those operating loans, it won't be long," Fahy said. "Dairy is certainly one of those areas where we have already seen foreclosures and people getting out of the business."


Jim Goodman, of Wonewoc, Wisconsin, was one of nearly 700 dairy farmers in that state who shut down last year as he closed his 45-head organic dairy last fall. Wisconsin has lost roughly 40% of its dairy farms over the past decade. He explained the problem currently for dairy farmers: "Just too much milk."

Goodman added, "I just got a USDA dairy newsletter yesterday about milk production for the last month, and outside of a couple of states, milk production is up a 1.5% increase nationwide."

On the state level, officials point to hope in the farm bill's new Dairy Margin Coverage (DMC) program. USDA earlier this month detailed payment options for January market conditions that would kick in for dairy farmers based on the coverage they enroll in, but program enrollment might not happen until June. USDA has said it's made dairy enrollment rules top priority to iron out as the agency readies for handling new farm bill programs.

As others are reporting about farms in general, Goodman is hearing lenders will increasingly move to foreclose this spring rather than loaning yet additional operating funds for debt-heavy farmers to put out the 2019 crop.

Many dairy farmers are deciding on their own to close while they still have some equity in the operation, Goodman said. "Over the last few years, I have had a few neighbors that have made that decision," he said. "Two years ago, cows were worth a little bit more money and the forecast was that milk prices were going to go back down, and they said, 'Let's get out while we still have something left in it.'"

On the national level, leaders insist there's light at the end of the tunnel for dairy farmers with a possible trade deal with China and ratification of the U.S.-Mexico-Canada Agreement. For others, the buzzword in dairy is supply management, which has gained a lot of popularity in Wisconsin with the Farmers Union.


"Almost all of the popular farm press has articles about supply management where a few years ago almost none of them would," Goodman said. "It may not be something that has a lot of support politically, but it certainly seems that the farmers are looking at Canada where not many farms go out of business and you are kind of assured getting a fairly decent price for your milk.

"Every time farmers see something like that going on, they ask, 'Why?'"

Agriculture Secretary Sonny Perdue was pressed earlier this month by farmers in Vermont about supply management. Philosophically, Perdue just couldn't go for it, according to Vermont Public Radio.

"The dairy industry is wide and broad in the U.S., [and] I don't really see a lot of hopes for a Canadian-type supply management system," Perdue said. "Look, when you're under economic stress and you're rushed, you look for any kind of help where you can find it. I certainly understand, I'm not offended by the question. I just don't think the spirit of entrepreneurship and economic liberty in the United States really calls for a supply management system in any of our crop areas."


Agricultural economy experts often point to the strength of farmland throughout this downturn as a saving grace, but land values show signs of softening in key farm states. Nebraska agricultural land values, before last week's flood, had declined by 3% since a year ago, according to preliminary results from the University of Nebraska-Lincoln Farm Real Estate Market Survey. The statewide average of land values is $2,650 per acre. Values have dropped nearly 20% since peaking at $3,315 in 2014. Rental rates were also down, including a 10% drop in center-pivot-irrigated cropland in northern Nebraska.

Iowa farmland values also fell 2.7% overall over the past year, according to a new report from the Iowa Chapter of the Realtors Land Institute. The average farmland value statewide was $6,794 an acre. Iowa land values have fallen roughly 17% since 2013, the Des Moines Register reported.

Tom Jensen, senior vice president of lending, First National Bank of Omaha, said the number of problem loans are ticking up, but lot of good decisions in recent years to helping more farmers hold their heads above water.

"While land values are off their peaks, they haven't taken large drops, at least in our area. But the big help is that interest rates continue to be reasonable. Farmers are having losses, but the effects of that don't compare when loans are at 5% to 6% versus (in the 1980s) when they were in the teens and up to 20%."

He said bankers also capped loans on land back when farmland was being bought at a fast rate. "There was a lot of ground in Nebraska selling for $10,000 an acre, for example, and we were capping loans on that at $5,000." That forced growers to start ownership of that land with a higher equity situation than in previous land-buying sprees.

Another challenge to the U.S. farm economy is just how much global competitors have hit their strides in recent years. Global wheat stocks were a record last year, and rice ending stocks are projected at a record this year. Global soybean beginning stocks, production and ending stocks all continue to rise, while corn production globally is expected to increase from 2017-18 and ending stocks are projected to be down 12% from the 2016-17 ending stocks as demand rises.

"We are looking at tremendously rising supplies," said Chad Hart, an associate professor of economics and crop markets specialist at Iowa State University. "Agriculture globally has just been on an incredible productivity run over the past several years. That has helped pull things along, but it also means prices can't improve that much because there is just so much supply hanging in the market."

Hart said one reason delinquencies aren't higher is banks have done their work and made sure not to loan out to operations seen as substantial risks. "Instead of letting that farmer go delinquent, they are cutting that farmer off before they offer that next loan," Hart said. That leads to farmers having to either liquidate assets or give up portions of rented land, as Peiffer has seen in Iowa.

Lower farm incomes have eroded the overall balance sheets, but they have disappeared from the rolls that normally gauge whether farmers are in trouble. Farmers struggling financially aren't showing up in the delinquencies or bankruptcies yet, but they are looking at alternative lines of credit as a way to get by.

"They are looking for ways to get by, even if that means going outside the traditional boundaries of what we would consider ag finance," Hart said.

Iowa is seeing an increase in calls to its hotline, but crop farmers have been able to push through the low prices with higher production.

"For the most part, over the past few years, we have seen yields high enough that farmers have busheled their way through some of these financial issues over the past few years," Hart said. "While things haven't been great, they also haven't been extremely bad, either. Farmers who were just getting by in 2016 have continued to get by 2017 and 2018."

Data on loans and other financial indicators are a "muddy mess," and hiding some significant problems in agriculture, Hart said. "When we look at the industry averages, we look fine," Hart said. "It's hard to argue looking at the loan-repayment rates -- we're in good shape -- debt-to-asset ratios across the industry are looking good, but when you burrow down into a region of the country, or a specific commodity itself, then you see there is a larger group of folks out there."

Some of those problems have been covered up by large production numbers, as well as the Market Facilitation Program payments. As of this week, USDA had paid just over $8 billion to farmers since the program begin last fall.

While beef and pork producers have not been at the center of financial issues, there too, the immediate future holds peril. Jensen, at First National of Omaha, has a high number of cattle operations, particularly feed yards, in his lending territory. While profits have been relatively strong due to lower feeding costs, Jensen sees the potential for troubles, primarily related to the rough 2019 winter.

"These feed yards are in rough shape with all the rain and snow. That pushes the cost of gains up," as animals consume more calories to stay warm versus putting on pounds. Conception rates are predicted to be lower for cow/calf operations thanks to the long, cold, wet winter, decreasing sales and increasing carrying expenses for the cow herd.

"Still, we have very few delinquent loans" among the bank's cattle sector borrowers, Jensen said.

Jensen agrees that relatively strong land prices have helped prop up the farm economy. He also credits farmers being more proactive in their financial and marketing dealings, rather than staying silent until they're past the point of no return. "We've been hiring more CPAs and attorneys with expertise in financial and succession planning. We're spending a lot more time advising families on those business and family plans, rather than simply being a lender." The same efforts that help pass on successful operations can give early warnings of troubles ahead.

Shan Hanes, president and CEO of Heartland Tri-State Bank in Elkhart, Kansas, said Kansas shows a strong moisture profile going into the spring. He's been working with customers in his area who were struggling, such as those who lost a crop last summer and began working with the bank early to restructure loans. Hanes said he doesn't think his bank has any customers in a crisis. "But what we are seeing is a loss of working capital position," he said.

Loss of working capital was a common concern at a meeting of agricultural and rural bankers last week, Hanes said.

"They are making their term payments -- their real-estate or machinery equipment payments -- but it is coming at lower liquidity and creating a cash-flow crunch," Hanes said.


A common move is to restructure operating loans into longer-term debt. "Sometimes restructuring is OK," Hanes said. Restructuring can put cash back into an operation, but Hanes said regulators are scrutinizing refinancing. Without pointing to a specific regulator, Hanes said the pressure is on banks to minimize restructuring farmers who struggled to cover their operating loans, or are losing equity in the operation. Regulators need to realize the tactic doesn't necessarily hurt the farm operation because interest on an operating loan is probably a higher rate than banks can offer real-estate. "By restructuring, we're helping the producer on interest-rate expense and liquidity."

In his history, Hanes said when farmers get short on cash, they start making short-term decisions and may reduce expenses such as fertilizer applications or chemical application that could increase revenue with higher production.

"We're doing more restructurings more for liquidity than a stressed borrower-panic situation," Hanes said. "I just want that message to get out to the world, and specifically to regulators, that this is a plan and it's not a last-ditch effort."

Hanes indicated bank regulators are looking at farm loans, declaring them bad, and requiring foreclosure rather than giving the farmers and banker more flexibility. The ruling is "'Hey, you've got a bad loan here and you should have foreclosed.' The guy has got equity; the guy has performed. The guy has got positive net worth. The guy is still at a long-term farm operator in the right direction. We just happened to land on a year the cash was not as good. Restructuring makes sense," Hanes argues.

For other farmers, restructuring is no longer an option, according to Buhler at Kansas Ag Mediation Services. He is increasingly seeing farmers who have restructured carryover debt or delinquent debt against assets, such as farmland.

"Now, this year they are delinquent again and they don't have any equity left to restructure against and an inability to make payments on their debt," Buhler said.

Once debt begins to exceed the value of assets, the decision is usually swift. "That makes it almost impossible sometimes to go to a lender and find a way to restructure if you have a negative net worth like that," Buhler said.

Such scenarios point out to Buhler that more farmers are facing greater financial jeopardy, and that carries over into more farm families dealing with stress. "Farmers just don't know what to do and they are trying to determine priorities and which bills to pay, and how do they keep lights on and food on the table, even," he said.


When lenders say no, farmers often call Farm Aid offices for legal services, financial counseling or emotional support. Usually, those three issues are heavily intertwined. "Typically if a farmer is calling related to an emotional crisis, it's related to financial or legal concerns," Fahy said. "What we've seen in the doubling of calls is also an increase in the severity of calls that are coming in such that we are seeing calls from farmers who are in dire straits -- some of them considering suicide."

Farm Aid staff have taken more training on how to spot the signs of people at risk of harming themselves and how to approach them. "So, from our standpoint, we are at a crisis and we don't have the resources to properly address it."

For farmers facing no available cash, Farm Aid has some emergency grants to needs such as buying food, paying for emergency medical expenses, or keeping the power on. Most of the calls come from established farms, but they involve all kinds of commodities -- crops, vegetables and livestock. "It's really hard, and the calls are coming from farmers of all kinds," Fahy said.

Buhler said he has been doing this work for 30 years, but said it is tough to insulate himself when a farmer is crying on the other end of the line, "or a farm family is worried about feeding their kids. It is that type of thing where the stress is real and people are affected, and that's what sometimes is glossed over by the big picture people are trying to take of this thing," he said. "It may be a cycle, but nonetheless, people are trying to make a living out here."

Buhler added he has referred a few families this year to the national Farm Aid organization, which offers financial help and other assistance. Buhler noted that's something he hasn't had to do in several years.

"So there are some real difficult situations out there," Buhler said.

Jensen said while the number of problem loans are ticking up, he credits a lot of good decisions in recent years to helping more farmers hold their heads above water.

"While land values are off their peaks, they haven't taken large drops, at least in our area. But the big help is that interest rates continue to be reasonable. Farmers are having losses, but the effects of that don't compare when loans are at 5% to 6% versus (in the 1980s) when they were in the teens and up to 20%."

He said bankers also capped loans on land back when farmland was being bought at a fast rate. "There was a lot of ground in Nebraska selling for $10,000 an acre, for example, and we were capping loans on that at $5,000." That forced growers to start ownership of that land with a higher equity situation than in previous land-buying sprees.

DTN Editor-in-Chief Greg Horstmeier contributed to this report.

Chris Clayton can be reached at

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Chris Clayton