Minding Ag's Business

Federal Reserve Sees More Farm Credit Stress

Farm lenders surveyed by the Kansas City Federal Reserve expect a surge in loan renewals and extensions, and a drop in repayment rates, following widespread farm and ranch losses in 2015.

Three straight years of falling farm incomes are beginning to extract a toll.

The outlook for ag credit conditions deteriorated sharply in late 2015, based on a fourth-quarter survey by the Kansas City Federal Reserve. Bankers expected a surge of farm loan demand and loan renewals and the steepest drop in repayment rates in the last decade, the survey found.

All of those factors indicate "pressure is starting to build on some farm borrowers," said Nathan Kauffman, Omaha branch chief and assistant vice president of the Federal Reserve Bank of Kansas City. To date, however, commercial banks continue to report low delinquency rates and a portion of their borrowers with very strong credit.

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Persistently low prices for agricultural commodities set the tone for the Fed's survey. From January 2015 to December, feeder cattle prices plunged more than 25%, causing significant damage to cattle margins. National average prices for soybeans and wheat dropped 14% and 19% respectively last year. Average corn prices hovered about 40% below their 2013 levels. Meanwhile, production costs have been slow to adjust, pushing many operators into the red.

The district covers a swath of states from Oklahoma to Montana, including irrigated corn production in Nebraska and Kansas. That means it’s a good proxy for both Grain Belt and livestock credit conditions, Kauffman added.

In addition to concerns over credit quality, lenders expected farm and ranchland values to sink below 2014 levels in all but Oklahoma. The Tenth District averaged a 4% annual decline in nonirrigated land, while irrigated slipped 2% and ranchland held steady. The volume of farmland sales also dropped in 2015, lenders said. "A more limited supply of farmland available for purchase, then, may partly explain why farmland values have retracted only modestly" from recent peaks, the Fed said.

Kauffman is watching the outcome of cash rent negotiations this spring as the next warning of farmers' well being. "Will some producers walk away (from high priced rents)? Were others waiting in the wings to pick up last minute deals? In the past, somebody has always been wanted to expand," he said. Given that USDA expects major crop cash receipts to slide another 9% in 2016, big spenders may be hesitant to outbid their rivals this time.

Based on conversations with lenders, Kauffman believes there's a "small but modest group of borrowers who haven't done their due diligence. Their 2016 plans don’t cashflow. Some of that reflects that fundamentals don't support their business," he said.

On the other hand, there's a large subset of farm borrowers in a good financial position who could benefit from a turnover in land rentals or ownership, he said. He expects them to weather the setback.

Follow Marcia Taylor on Twitter@MarciaZTaylor

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