Ag lender discusses impact of COVID-19 on farm finances

Nate Kauffman, vice president and Omaha Branch executive of the Kansas City Reserve Bank, told listeners on a webinar hosted by the University of Illinois, March 27, things have been changing extremely rapidly over the past two weeks.

The webinar focused on financial perspectives on agriculture and coronavirus, and Kauffman made it clear, the markets and economy are changing because of the virus, and it’s not yet turned into a banking crisis.

“This is a fundamentally different kind of development that we’ve been facing the past few weeks, relative to the recession and financial crisis in 2008 and 2009,” he said. “Which was squarely focused on the on the banking sector.”

Secondly, there’s nothing that suggests there’s something fundamentally wrong with the United States economy, rather this has been something that’s been a shock to the economy.

“I would say that it is squarely connected to healthcare,” he said. “So the path of what we see going forward will likely be directly tied to progress, one direction or the other in terms of resolving issues surrounding the virus.”

Understanding what it is—in terms of economic terms—is different for specific segments of goods and services in the economy.

“Anything related to travel, restaurants, or really anything that requires in person group gatherings, has seen an unprecedented drop in business activity over a very short period of time,” Kauffman said. “So even in a crisis it’s going to be focused on those specific sectors at the beginning, obviously, no sector will be immune.”

As for agriculture, it’s important to be cognizant of solvency and liquidity. In the world prior to COVID-19, the U.S. Department of Agriculture suggested farm incomes might be up a bit in 2020.

“Part of that likely coming about in the last couple of years with some support from the Market Facilitation Program,” he said.

Leverage

Even though the debt-to-asset ratio has been picking up recently, suggesting leverage is something that needs to be paid attention to. 

“It still has been historically low,” Kauffman said. “For those of you that were farming in the 1980s, you may know that this ratio had exceeded 20% during that time, so it’s something that we monitor.”

Even though incomes have been increasing a bit the past couple of years, there’s still been ongoing concern even before coronavirus hit, of what’s happening with working capital.

“So if you’re a banker, and you are looking to finance a borrower who’s working capital has been deteriorating, that’s a conversation that maybe you know that that lender is going to need to continue to have with the borrower just to make sure that going forward their risk management practices are being put in place,” he said.

Prior to coronavirus spread, there were some changes related to commodity markets. There were some declines in cattle and milk markets, even in corn.

“What was important to keep in mind again, is this is very much a global economic crisis,” Kauffman said. “And it’s hitting other markets much more severely.”

Volatility

There has been a notable pickup in volatility—some in the cattle market, but other equities are suffering too.

“But again, this sort of pales in comparison to what we’ve been seeing in crude oil and markets connected to energy,” he said. “And obviously, even as it relates to equities, there’s been a tremendous amount of pickup in volatility more broadly.”

Going forward Kauffman sees a highly uncertain future.

“I think that’s what many of us are also feeling at the moment recognizing that it is, in fact, a healthcare crisis with a very uncertain outcome,” he said.

The KC Fed connects a lot of lenders with many other businesses and organizations in the region, and can get a sense of the sentiment surrounding agricultural finance. It routinely surveys ag banks in the region and in other parts of the country. The KC Fed will have a full report out soon, but of the data he’s seen, the bankers have been trying to get a sense of how others are thinking about farm income and more specifically credit conditions. It’s consistent with the uncertainty many are feeling.

“Many people might expect a little bit of weakening, maybe specifically as it relates to loan repayment,” he said. “Obviously farm income—an element of this that we’re expecting to see a little bit of a pullback.”

The cattle market has declined sharply because of COVID-19 expanding too.

“We’ve seen some price recovery there, but certainly the volatility in that market is one that’s worth paying attention to,” he said. “The second is biofuels and so the ethanol sector specifically is dealing with oil prices at $20 or just above a sharp drop in gasoline and ethanol prices.”

Non-farm economy

Another area to focus on could be anything that’s connected to the non-farm economy.

“You could see some weakening in the farm economy, just to the extent that there is there may be a spouse that’s working off the farm that’s providing income to help support the farming operation,” Kauffman said.

There’s been a lot of concern in agriculture regarding supply chains and delivery of food products too, Kauffman said.

“We spend a lot of time at the Fed talking to businesses and hearing from production facilities about how things are playing out and, and in all the conversations that I’ve had so far I’ve not heard anyone say that there have been issues, disruptions in terms of delivering product as it relates to the supply chain,” he said. “It’s been stretched and they’re doing all they can to keep up.”

Land values

That’s been one positive, another could be land values.

“You could envision a number of different scenarios where there’s maybe more pressure on land values going forward, given some of the challenges that we’ve already been describing, but the data that we’ve been collecting, and many that I’ve talked to here in the past month or so, still would, would say and show that land values have been holding up okay,” Kauffman said. “There’s maybe not a lot transacting, and that’s reasonable. But I think that’s one other thing to keep in mind in terms of an important aspect of the farm economy and farm finances.

When questioned whether there are any signals that the impact to the banking sector is growing or becoming increasingly concerning, Kauffman said the Fed has been focused on liquidity and trying to get a sense of how well banking is positioned to provide credit to those businesses who might really be in need of it.

“Businesses that are especially short on cash, given some of the dramatic decline that they’re seeing in revenue,” he said. “And most of what we’ve been seeing so far is that liquidity, at least within the banking sector has been relatively positive.”

There have been some markets where it’s been a little bit more of a stretch, and many of those have been introduced as a way to try to make sure that credit markets are operating as they should be.

“So we continue to pay attention to how well banks are capitalized and liquidity,” Kauffman said. “But so far the both of those have been relatively positive and certainly much better than what we would have observed during the 2008-2009 recession.”

As for international supply chains and countries issuing export bans, Kauffman said, along with everything else there is some uncertainty in the international markets as well.

“There’s a number of different things that are popping up from time to time,” he said. “As it relates to U.S. exports. There are actually some markets that have looked relatively positive and meat products going into China has been one of those, certainly coming off with some of the African swine fever concerns there.”

Kauffman’s heard of delays at ports over seas, and products related to agricultural production—machinery, parts or other inputs—it’s possible for there to be delays for those items.

“But in terms of the shipments and supply chains generally still functioning, I think that most of what we’re seeing is that those are still holding up relatively well,” he said.

Another question that came during the webinar—how many more years of losses on farms until widespread liquidations of farms? It’s been happening some in the dairy industry, but what about grain and livestock farms?

“Pretty consistently over the course of the last three or four years, specifically, whether or not lenders are seeing a pickup in what they would described as sort of ‘lender encouraged asset liquidation’ or whether there is really a sharp pickup and in some of the liquidation that would suggest that you’re seeing more challenges,” Kauffman said. “It has not been the case yet that’s been widespread or systemic.”

Financial stress

There’s certainly been more examples of financial challenges—bankruptcies of small to mid-sized dairies the last couple of years. Its been in other operations too.

“While it is a broader reflection, I think of a pick up in financial stress, it still has remained relatively low, particularly in comparison to what we would have observed in the 1980s,” Kauffman said.

There might be a larger segment of agriculture facing pressure, and it would play out first in ongoing declines in liquidity and then eventually start to translate into that debt to asset ratio.

“Those are key indicators that I think a lot of us are trying to monitor to get a sense of how it might play out,” Kauffman said.

Kylene Scott can be reached at 620-227-1804 or [email protected].