Many U.S. farmers and ranchers are facing a more challenging economic environment than in past years. Trade uncertainties, large commodity supplies and weather extremes have suppressed farm prices and producer returns for key commodities.
In testimony before the House agriculture subcommittee on commodity exchanges, energy and credit, Farm Credit Administration (FCA) chief executive officer and board chairman Glen Smith said current capital levels in the Farm Credit System (FCS) are “well poised to deal with the struggling ag economy,” although a continued conservative approach to lending is warranted.
The U.S. Department of Agriculture estimates that net cash farm income in 2019 will remain well below record levels set six to seven years ago. Debt is also rising.
Smith said U.S. farmers have taken on an estimated $41 billion in additional farm debt over the past three years. Adjusted for inflation, total farm debt outstanding is nearing the record set almost 40 years ago. Income shortfalls have cut working capital and elevated borrowing needs. “With cash flows tight, the number of producers finding it difficult to repay their loans is growing, albeit at a modest pace. Increasingly, producers are restructuring their debts to improve their cash flow,” Smith explained in his testimony.
For the latest third quarter, the percentage of non-performing loans -- those 90 days overdue -- is 0.92%. Although this doesn’t seem alarming at less than 1%, he said it reflects the need for a “cautious regulatory attitude.” In 2018 the amount was 0.83%, and in 2017, it was 0.67%. Smith said the numbers reflect the “creep of deteriorating financial quality” and conditions not improving.
Smith’s written testimony noted that credit stress within FCS’s farm loan portfolio remains low, but loan weakness continues to creep up. Financial stress is regionalized and most prevalent in commodities such as dairy and grain (corn, soybeans and wheat). Of the 10 states with the highest levels of less-than-acceptable loans, six are in the Midwest, and only Texas and California are outside key grain production regions.
He said many indicators today mimic those seen in the mid- to late 1980s, with decreasing farm incomes, eroding debt-to-asset ratios and land values dropping 15-20%. Those events were tipped off by trade wars, including the Russia Grain Embargo. Lessons were learned from the '80s and reflected in the conservative attitudes and regulatory posture from lending banks but will be prudent to remain on watch for now.
Smith said current low interest rates have helped but questioned how the overall condition of the system would be affected if interest rates climbed higher, noting, “We’re safe and sound today, but what happens if credit continues to erode?”
FCS institutions have indicated that, as lenders, they will work with customers if they are willing and able to make changes to their operations to restore profitability. “Fortunately, system institutions have the financial capacity to work with their customers. Other lenders may not have this capacity, or some borrowers may have already used up their opportunities to restructure their balance sheets,” Smith’s written testimony noted.
Smith said restoring markets is a critical long-term solution to bring producers back to profitability. Market Facilitation Payments have “helped shore up short-term deficits, but long term, we need those markets back,” he said. Smith also encouraged passage of the U.S.-Mexico-Canada Agreement and the trade agreement with Japan.