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Lenders expect tightening fiscal farm conditions

New survey of ag lenders sheds light on impact of lower commodity prices, with "major correction" expected.

A new joint study by the Kansas State University department of agricultural economics and the University of Georgia shows that lenders from across the nation are expecting the financial outlook for farmers to tighten in the upcoming seasons.

The 2016 "Spring Ag Lender Survey" shows that the current financial conditions are taking a downturn due to an expected increase in non-performing loans and land devaluations that are causing land leasing issues. Lower commodity prices have had an immediate effect on producers, but there may be more trouble ahead as leveraged farmers are feeling the pressure from lower grain and livestock prices.

“We are in the early stages of a major correction in the agricultural economy,” one survey respondent noted. “Given the accumulation of corn and soybean inventories, this could be a prolonged and painful process.”

The respondent suggested, however, that an equilibrium of costs and revenues will eventually be reached, and the agricultural economy then will stabilize; “the producers that made conservative decisions will weather the storm, others will need to make major adjustments or fail.”

Christine Wilson, Kansas State agricultural economics professor, said the survey shows that lenders are observing the tightening fiscal conditions and expected declines in land values as a key indicator in a projected increase in non-performing loans.

“With these crop prices, expect a significant gut check by the producers,” another survey participant noted, adding that farmers are facing a significant challenge.

The survey shows that lenders see a need for increasing risk premiums for agricultural lending. From the fall of 2015 to the spring of 2016, lenders noted that for total farm loans, the number of non-performing loans rose. Lenders anticipate the number of non-performing loans to continue to rise, particularly for the corn, soybean, wheat and beef sectors.

Demand for farm operating loans remains high as liquidity and cash flows are problematic for many producers, according to the study. Lenders reported elevated cash rental rates and a slow adjustment to the lower commodity prices seen in today’s market.

The Kansas State department of agricultural economics conducts the "Ag Lender Survey" semiannually to capture short- and long-term assessments for the future of the agricultural credit environment.

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