As combines roll across much of the nation’s mid-section, many farmers are finding bumper yields. But the bad news is, market prices for most commodities are still sagging. As a result, more farmers are starting to worry about access to credit in 2017.
“The farmers and ranchers that I talk to remain in distress and worry whether their family farm can stay afloat,” noted Senate Agriculture Chairman Pat Roberts, R-Kan., said during a recent committee hearing.
Many farm households would be losing money if not for their off-farm earnings, he added.
In fact, USDA’s Economic Research Service announced last month that it expects farm income to drop for the third straight year. It’s predicting a decline to $71.5 billion for 2016, from $80.7 billion in 2015 and $92.6 billion in 2014.
Still, Agriculture Secretary Tom Vilsack explained during that same Senate Agriculture Committee hearing that the farm debt loads remain far below the levels of the 1980’s crisis. Only 10 percent of farm operations are classified as highly or extremely leveraged, he said.
Vilsack acknowledged that the dairy industry in particular is struggling but he said that the department’s ability to help is limited by restrictions congressional appropriators have placed on purchasing surplus commodities through the Section 32 program. USDA agreed in August to purchase $20 million in cheese, but that’s all the department can do, he said.
“Everything I can do I have done. Every penny I could spend I have spent,” Vilsack told committee member Pat Leahy, D-Vt.
Credit demand grows
USDA’s Chief Economist Rob Johansson told Agri-Pulse that farm credit demand has been growing since 2011 and saw spikes in the boom years of 2013 and 2014 when prices were high, income was strong and farmers felt confident enough to increase investment in new equipment and land. But now many farmers have taken on too much debt and are having trouble making payments.
The average debt-to-asset ratio has risen this year, as has the number of nonaccrual loans, and that’s making it harder and harder for bankers to lend out money, especially as farmland and other asset values are coming down, he added.
Sterling Liddell, Senior Vice President for Rabo AgriFinance and Rabobank International, cautions everyone to be “very cautious” when evaluating the current farm economy.
“Often, in the past, we’ve looked at debt-to-asset ratios and different types of balance sheet ratios and said the farm economy looks great,” Liddell explained.
“What we really need to look at is the ability to cover the debt that farms have accrued. In other words, can they generate liquidity from production activities to cover the interest payments they have to make and be able to secure financing going into the next year?
“If we don’t do that, there are a lot of farmers that will find, come spring, that they actually are running up against tighter credit standards that are more averse to risk and they are not going to be able to finance their crop,” he explained.
Liddell said it’s important to monitor what is happening at the income generation level.
“There are a lot of signals out in the industry that there are challenges financing debt. We see a lot more special asset managers out in the country – those are people that manage loans in jeopardy,” he said.
“We also clearly seeing a lot of farmers looking for capital and trying to find the right way of financing. We see very challenging credit conditions across big parts of the row crop area.”
There is some disagreement as to how deep we are into what we would call a ‘farm crisis,” Liddell noted. “It’s a bit of a strong term right now, but certainly we are on the edge of liquidity and facing challenges going forward over the next couple of years.”
In the meantime, USDA officials continue to keep a close eye on credit conditions. In fact, Johansson said the ailing financial situation for many of America’s farmers will be getting special attention at the next USDA Agricultural Outlook Forum. That’s an annual gathering which attracts representatives of the agriculture sector from around the world every February for two days in Arlington, Virginia. The next event is scheduled for Feb. 23-24, 2017.
By: Sara Wyant
Editor’s Note: Agri-Pulse Senior Trade Editor Bill Tomson, Senior editor Philip Brasher and Agri-Pulse Contributing Broadcaster Jeff Nalley contributed to this report.
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