Shock Therapy for Finances

Fri. May 29, 2015 4:06 PM

By Marcia Zarley Taylor
DTN Executive Editor

HADDONFIELD, N.J. (DTN) -- Anyone who has entered grain farming since 1990 must be bracing for a little shock therapy.

Inflation-adjusted farm incomes are expected to bust a 25-year-old record over the next few years, if USDA forecasts hold. That's giving a new urgency to proactive planning for 2016, says AgriBank Chief Credit Officer Jeff Swanhorst, who monitors the Farm Credit System's credit quality in 15 central states. Already, 2015 incomes are falling more sharply than in 2006 and 2009. USDA's long-term forecasts project net farm incomes through 2024 "lower than the 1990s and a whole lot lower than the last five years," especially for the grain sector, Swanhorst notes.

"Growers will need to become as entrepreneurial as they've ever been in their careers to get costs down to live in this environment," he says. As with any cycle, the goal is to survive long enough to benefit when prices eventually rebound. Highly leveraged farms with big land costs could find that problematic.

One concern to farm lenders is how the concentration of debt has shifted since the 1980s, AgriBank notes in a report released this week. USDA claims 75% of U.S. farm operations (including hobby operations) are debt-free, compared to just 32% in 1979. But in 2012, approximately 4% of farmers held 68% of total U.S. farm debt -- about the same share held by 30% of the farmers in 1979. The upshot is that far fewer operations are shouldering big debt today, but they control about the same amount of assets in the marketplace as vulnerable farmers did in the 1980s. What's more, this tiny fraction of U.S. farmers produces half of U.S. net farm income. Their failing financial health could provide expansion opportunities for others, but also disrupt land and equipment markets.

Swanhorst worries most about higher-leveraged operations with debt-to-asset ratios over 50% and producers with high costs on a significant land base, whether it's rented or purchased. "Producers with owned land purchased over the last 20 or 30 years have almost nonexistent land costs, so they're able to fare better in this environment," he says.

Nate Franzen, president of agri-business for First Dakota National Bank in Yankton, South Dakota, shares those views. But he notes there's a whole generation of producers who may not have lived through a setback of this scale and may be a little complacent about how fast farm finances can erode. In the last few years, his bank launched a young farmer education course to better prepare operators for such cycles.

"Next year will be a telling year," Franzen says. "Grain prices are soft compared to the cost of production. If we get adequate moisture and raise another bumper crop, people are going to have to get creative to find ways to cut costs without affecting yields."

A top focus will be addressing bloated cash rents that proliferated during the glory days of $6 and $7 corn, but have yet to match the 50% drop in prices, lenders say. Early in any ag cycle, new renters offer a similar price if a previous tenant and landowner can't come to terms. By year two or three of a price correction, fewer newcomers are willing to take the risk, so they're expecting more rent relief in 2016.

A recent University of Illinois analysis shows average cash rents will need sizable adjustments to bring operators back into the black if 2015 prices persist another year. That's on top of modest $20- to $25-per-acre cuts renters negotiated for this season. At $3.75 corn and $9.50 soybeans, cash rents would need to decrease another $70 per acre from 2014 averages before a typical Illinois grower's return meets zero, economist Gary Schnitkey figures. Average 2014 rents vary from $163 in southern Illinois to a high of $293 in the central region.

However, single-year cash rent adjustments above 10% hardly ever happen, and no key Corn Belt state has registered more than an 18% annual decline since the 1980s, according to the Federal Reserve. To make ends meet in 2016, growers will also need to shave non-land costs such as fertilizer, seed and chemicals to offset some of their steep rents, economists and lenders agree. Few concessions have occurred so far.

"Most of our clients entered 2015 in pretty good shape, with operating loan availability and working capital, but the concern is what happens if you project these prices into 2016," Jim Moriarty, AgStar Financial's relationship manager for large grain and livestock accounts, tells DTN. Late last year, he was urging crop farmers to double their normal working capital levels to $400 to $600 per acre, but drops in inventory values helped erase $100 to $200 of that by year-end, he figures. Now he urges growers to be proactive this summer by updating cost of production and getting a disciplined marketing and business plan in place for 2016.

The good news is that many operators retain a high level of equity in land and have opportunity to stretch out payment terms, Moriarty adds. Unlike the 1980s, today's interest rates remain at near-historic lows. Prime rates are running 3.25%, not the 21% high of 1981. Also, unlike the 1980s, farm lenders now offer long-term fixed rates of 10, 15, 20 or even 30 years.

It's worth discussing your situation with your lender early this summer, long before a loss materializes at year-end, farm lenders say. Adds Moriarty, "After a second year of losses, rebalancing gets a lot tougher."

To read the AgriBank report, go to…

To read the University of Illinois farmdoc daily report, go to…

Marcia Taylor can be reached at

Follow Marcia Taylor on Twitter@MarciaZTaylor


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