Ag economic conditions show credit red flags

December 17, 2019

Farm banks and farm credit services have stable ag loan portfolios but remain concerned about rural economic conditions.

 

In testimony before the House Agriculture Committee on Dec. 11, Marc Knisely, president and chief executive officer of AgCountry Farm Credit Services, testifying on behalf of the Farm Credit System (FCS), stated that the multiple years of lower commodity prices have started to hit hard.

 

“As a result, the farm balance sheets that were strong in 2013 today are far weaker. Most worrisome, after six difficult years, working capital levels – the difference between current assets and current liabilities – have declined sharply. Working capital is the cushion against tough times. For many producers today, that cushion no longer exists,” he said.

 

Knisely said most private and U.S. Department of Agriculture forecasts do not foresee a surge in commodity prices. “In this price environment, it will be very difficult for farmers to recover the economic losses of the past few years and rebuild their financial strength,” he said.

 

“As difficult economic conditions continue, farmers are becoming more financially stressed, and Farm Credit loan portfolios are beginning to show that stress. Fortunately, three important factors are combining to give farmers and ranchers a chance to survive this downturn: low interest rates, continuing strong land values and a non-farm economy that continues to provide job opportunities outside the farm gate,” Knisely said.

 

It has been a difficult year for U.S. farmers and ranchers. Trade disruptions, weather extremes and low farm prices have presented significant economic challenges for agricultural producers, according to the latest quarterly report on economic issues affecting agriculture, together with an update on the financial condition and performance of FCS as of Sept. 30, 2019, which were shared with the Farm Credit Administration (FCA) board at its monthly meeting on Dec. 12.

 

Crop insurance indemnities, farm programs and Market Facilitation Program payments continue to provide important financial support to the farm economy. The level of support provided under these programs varies by region and commodity.

 

Although the trade situation remains unsettled, there have been some positive developments recently. U.S. pork exports to China are increasing because of the overseas outbreak of African swine fever, and China continues to purchase soybeans periodically, although the level of future transactions remains uncertain.

 

With large global supplies, crop prices are expected to remain low in 2020, FCA said. “This will limit attractive price opportunities for U.S. farmers. Livestock and dairy returns are likely to be positive in early 2020, but trade risks remain elevated,” FCA said.

 

For the first nine months of 2019, FCS reported steady earnings and higher capital. Portfolio credit risk is higher for the year, but levels remain acceptable. Although credit stress in the system's portfolio is up, FCS institutions “are financially sound and well capitalized. They continue to have the risk-bearing capacity to respond to the credit needs of U.S. agriculture,” FCA said.

 

While overall loan growth slowed somewhat this year, lending to farmers continued to increase. Since the beginning of the downturn in 2014, FCS increased its farm real estate and farm production lending by more than $36 billion, Knisely noted.

 

Today, FCS provides about 40% of the financing for production agriculture and serves nearly 500,000 customers across all of its lines of business, including agribusiness, rural infrastructure, rural housing and agricultural export finance.

 

In the same hearing, the Independent Community Bankers of America (ICBA) told the House Agriculture Committee that farm banks have stable agricultural loan portfolios but remain concerned about rural economic conditions.

 

In his testimony, ICBA community banker Steve Handke encouraged lawmakers to maintain a strong farm bill with robust crop insurance tools. Handke said total farm debt now exceeds $415 billion, so a modest increase in USDA guaranteed farm loan limits is warranted, and he stressed the need to level the playing field between community banks and the tax-advantaged FCS.

 

"Community banks are not fair-weather lenders but seek to work with their producers in both good times and bad," said Handke, regional president and chief administrative officer at First Option Bank in Osawatomie, Kan. "Let’s work together creatively to enhance solutions to assist our nation's farmers and ranchers and the community banks that serve them."

 

Community banks, which make roughly 80% of all agriculture loans from the banking sector, are doing everything in their power to keep their farm and ranch customers in business, Handke told the subcommittee on commodity exchanges, energy and credit.

 

He said market facilitation payments have made the difference between losses and slight profits for many farmers, although not all farmers affected by trade disputes benefit. He suggested that these payments need to continue until market prices rebound, but he recommended that the payments be more predictable to allow banks to incorporate them into cash flow projections.

 

Handke also said Congress should facilitate a competitive environment for all lenders. He said the tax and funding advantages of government-sponsored FCS threaten the continued availability of community banking services in rural communities, posing risks to the farmers and ranchers who rely on these tax-paying institutions.

 

Handke pointed to FCS’s “intrusion” into banking services by offering a checking account product with remote deposit features. He encouraged lawmakers to advance the Enhancing Credit Opportunities in Rural America Act (S. 1641 and H.R. 1872), which would exempt from taxation interest income on farm real estate loans and rural home mortgages in towns of fewer than 2,500 residents, helping community banks support their farm and ranch customers.

 

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