THE levels of working capital and liquidity in the farm sector will be crucial components of the future financial health and credit conditions of U.S. farm operations.
This was part of the message Nathan Kauffman, assistant vice president of the Federal Reserve Bank of Kansas City, Mo., shared with House Agriculture Committee members during a hearing June 25.
Kauffman and others discussed the current credit situation in rural America, especially as economic conditions have changed over the last year.
Current corn prices are 40% lower than last year, while average fed cattle prices are approximately 25% higher than a year ago. Livestock producers have seen a rebound in profitability, while crop producers have faced persistently high input costs, which are reducing their profit margins.
Kauffman testified that toward the end of 2013, declining profit margins reduced farm cash flow, and as a result, demand for operating and other agricultural loans began to rise and lending activity jumped considerably in the first quarter.
In the first quarter, he said new short-term farm loan originations increased 28% from the previous year. Total farm debt at commercial banks increased by 9.1% from a year earlier, and non-real estate farm debt rose by 9.9%. He said this was the biggest year-over-year increase since 2001. However, delinquency rates on agricultural loans remain historically low.
In 2013, farm banks — banks with more than 14% of their loans made to farmers or ranchers — increased agricultural lending 9.1% to meet these rising credit needs and now provide nearly $90 billion in total farm loans (Figure), according to Leonard Wolfe, president and chief executive officer of Kansas-based United Bank & Trust, the largest agricultural commercial lender.
Kauffman said high farm income in 2009-13 put many producers in a strong financial position ahead of the U.S. Department of Agriculture's forecast that farm income will decrease by more than 20% this year.
"If profit margins remain under pressure in the crop sector and debt continues to rise, the ability of crop producers to withstand an increase in financial stress may be a concern, even as the outlook for the livestock sector has improved," Kauffman said.
Producers with lower levels of equity, such as young and beginning farmers, "may be most vulnerable to financial stress," he said.
Chris Beyerhelm, deputy administrator for farm loan programs at USDA's Farm Service Agency (FSA), asked for more funding to meet the high demand for USDA credit programs, which is at the highest level since the farm crisis of the mid-1980s. By law, USDA is the lender of last resort for credit-worthy producers who cannot get financing elsewhere.
He testified that over the past two years, an unusually high number of direct operating loan applications have been received from new customers. Normally, about 20% of direct operating loan applications in any given year are from farmers who do not have FSA loans. In fiscal 2013, however, 37% of the direct operating loans made were to customers who did not have existing FSA operating loans.
U.S. farmland values will hold steady or decline somewhat in the near term due to lower grain prices and high production costs, lenders and financial experts told the House agriculture subcommittee.
Wolfe, who also testified on behalf of the American Bankers Assn., said 82% of farm and ranch wealth is in real estate.
When it polled its Rural America panel, the Independent Community Bankers Assn. said, "Generally, bankers stated farm income and farmland values would decline or remain stable."
Farmers who rent land may face greater financial stress than those with no land rental costs, Jill Long Thompson, head of the Farm Credit Administration, said.
Long Thompson said farm real estate mortgage underwriting has been conservative among government-based Farm Credit System (FCS) institutions as well as commercial banks.
"Consequently, we believe that most FCS institutions will not face significant losses because of adjustments in farmland prices," she said.
U.S. farmland values have risen annually since a slight slip in 2009 to reach an average $2,730 per acre in 2013, an 8% increase from the prior year.
The second panel of the hearing voiced some concerns about the role FCS plays in agricultural lending. Wolfe noted that FCS is his bank's largest competitor and often has an unfair advantage.
Wolfe said FCS has doubled over the last 10 years, and that hasn't all been within traditional agriculture. Congress created the system as a public option for farm finance when farmers were having trouble getting the credit they needed from non-government sources, but Wolfe argued that loans to young, beginning and small farmers decreased from a high of 30% of total new loan volume in 2003 to just 15.4% in 2013.
Wolfe said FCS pricing is hard to match since, in Kansas, there is a 4.375% state tax and a 34% federal tax, giving FCS a 38% head start.
Bob Frazee, president and CEO of MidAtlantic Farm Credit of Maryland, testifying on behalf of FCS, countered that the system is losing deals every day to commercial banks. In the end, though, it's that competition that gives farmers the best rates available.