Farm Credit CEOs paint mixed picture

While growing risks and uncertainties are squeezing farmers across the spectrum of crops, the farm credit situation is nowhere near as dire as in the 1980s: Farm finance is much more sophisticated and flexible, and crop insurance is much more favorable.

That was the picture painted by three CEOs of Farm Credit organizations in an Oct. 22 media conference call.

The three were chosen to give a broad coverage of crop sectors and geographic areas. Jeff Swanhorst is CEO of AgriBank, which is owned by and funds 14 Farm Credit Associations.

Together, these association and AgriBank have $111 billion of loans serving 375,000 customers, mostly in the Corn Belt, northern Great Plains and Delta. Byron Enix is CEO of American Ag Credit, which provides financial services to agricultural and rural customers throughout California, Colorado, Hawaii, New Mexico, Nevada, Kansas and Oklahoma, and to capital markets customers in all 50 states. Vance Dalton leads Carolina Farm Credit, which serves western North Carolina and manages $1.6 billion in mostly smaller loans serving 11,000 customers, including many part-time farmers.

Swanhorst said the Farm Credit Association loans in the AgriBank district cover many crop sectors, mostly corn and soybeans but also including wheat, cotton, sugar beets, rice, dairy, swine, cattle and poultry. Using charts from the U.S. Department of Agriculture, Swanhorst noted that since the 1980s downturn in agricultural asset values, the asset situation is much more stable, with a 13% debt-to asset ratio. He referred to USDA figures that show all ag debt totaling $450 billion, backed by farm assets of $3 trillion.

While these are strong numbers, he said, there are signs that lower commodity prices are eating into farmers’ working capital. An index of farmers’ working capital showed an uptick until 2013, then a reduction of more than half since then. That’s important, because a healthy margin of working capital is a “cushion for adversity” for farmers.

While net farm income is the best aggregate indicator of the financial performance of agriculture across decades, said Swanhorst, it doesn’t include off-farm income. He had a chart that projects net farm income for the next 10 years, but wryly noted that all such projections are likely to be proven wrong, even if they are the best estimates we have. 

Corn ‘downdraft’

While Swanhorst said he expects a slight uptick in corn prices, which have been on a “downdraft” since 2012, he doesn’t expect them to return anywhere near to 2013 levels. He said the two key drivers of agricultural land value are interest rates, which continue to be low; and income from the land. The low interest rates the economy has been enjoying for the past several years are “definitely a stabilizing factor” in the farm economy, he said, as are market facilitation payments, although they are not a long-term solution.

This spring’s wet weather meant many acres never got planted, and Swanhorst noted early that recent snowfalls in the upper Midwest will lead to more lost soy acreage this year. Crop insurance, however, is much more favorable than in the 1980s.

Swanhorst noted that the protein sector is under stress, with China’s ongoing swine fever epidemic and the fact that 20% of U.S. swine production is for export.

Land valuations

Swanhorst noted that in Iowa and Illinois, income from land is down since 2013, but in response to a question from Reuters about land valuations, he said that the “vast majority” of interested ag land buyers are connected with agriculture—a positive sign. Farmland is much less leveraged than in the 1980s, and farmers still want to buy more land in good years.

Swanhorst said he expects “a lot of positive interest” from farmers in putting some land into the Farm Service Agency’s Conservation Reserve Program as part of the effect from possible changes to the Renewable Fuel Standard. He said projections of farmland valuations assume stability in programs like RFS, and changes to the program “could be a significant negative factor” if mandates fall below 15 billion barrels.

American AgCredit has made a deliberate effort to diversify its loan portfolio across a range of crops and geographies to minimize and spread risk. At one point, California wine represented the single biggest commodity in the portfolio; it used to be almost 100%, but that was thought to be too risky. Grains, dairy, beef, forest products, fruits and nuts, and vegetables now make up a big part of the portfolio. “Our portfolio quality now looks like our customers, and it’s pretty good in macro!” Enix said.

Last year, AAC returned half its profits to customers, and enjoyed 99% loan repayment. But even today’s good loans are not quite as strong as in 2015, he said. He noted stress in three broad commodity areas. Not surprisingly, all grain crops are showing some signs of stress, especially in areas like Kansas, where rural real estate values are starting to “relax.”

Dairy, beef above break-even

The dairy industry has been running below break-even in three of the last four years across all states, said Enix; and, if the trend continues, it could result in more default rates. He did note that the dairy sector has, in general, now stabilized and has been running above break-even. This trend is predicted to continue for at least the next 18 months.

Beef has been affected by price fluctuations partly caused by factors such as the Aug. 9 Holcomb, Kansas, beef-packing plant fire that took a major packer offline. Tyson has said it will rebuild this winter. Weather events have also stressed the cattle herd. Despite these factors, said Enix, the cow-calf sector has been performing generally pretty well, with most challenges coming on the feeder side of the business.

Another source of uncertainty is the ongoing battle over water rights in all western states, not just California. “Long-held water rights and uses are being challenged like never before, and ag is on the negative receiving end of much of those challenges,” he said. “Advocates for strong agriculture all have a stake in staying informed and involved in influencing any changes positively.”

Overall, though, Enix stressed that the Farm Credit system is much stronger than it was on the 1980s. “Where some institutions pull back, we lean forward and increase our activity—we want to step in and provide financing for long-term operators,” he said.

North Carolina

Dalton’s organization operates mainly in western North Carolina, with poultry being the single largest part of the loan portfolio, along with Christmas trees and greenhouse vegetables. Most of the grain grown by his clients is sold in-state; that makes it easier for farmers to break even or make a profit, he said.

About 35% of his organization loans are paid off by farm income from part-time farmers who work in the cities and have small ranches or truck farms. CFC makes use of FSA loan guarantees, up to perhaps 25%. Dalton, too, noted that years of low commodity prices for grains have eaten into farmers’ working capital.

Dalton said part-time farmers “have been a strong portfolio for us. Lots of medical people want to work in town and have a small farm on the side; their loans help support the full-time farmers.” About 60 people a day move into the Charlotte area, and about 30 into Raleigh-Durham. “Some of those folks may have farm backgrounds, but they are new people getting into farming.” Part-time farmers also raise cattle, sheep and goats.

This year’s weather events hit North Carolina hard, he said. CFC’s staff is specially trained to recognize financial and personal stress, and to work with clients to structure loan payments. They also provide access to counselors and hotlines and services like reviewing business plans.

David Murray can be reached at [email protected].