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More ag banks slide into red as trade war drags on

More agricultural banks are reporting losses than at any time since 2013 as a result of the Trump administration’s ongoing trade war with China.

While there had been hope of a year-end deal that might have boosted crop prices just in time for planting season, farmers and their lenders are growing increasingly worried they will have to slog through another year without a resolution, potentially causing even more banks to slide into the red.

Of the nation’s roughly 1,300 ag banks, 3.55% were unprofitable as of Sept. 30, according to data released by the Federal Deposit Insurance Corp. late last month. That’s up from 2.33% just three months earlier and 2.19% during the same period one year prior. The FDIC defines ag banks as those with more than 25% of their total loans going directly to support farming operations or to real estate debt secured by farmland.

Farmers have been dealing with a slump in crop prices for years, but tariff hikes on agriculture exports to what had been their biggest buyer, China, are putting an even bigger strain on their finances. President Trump said at a meeting with NATO leaders in London on Tuesday he’s not in any rush to sign a deal to remove those tariffs.

“I have no deadline,” Trump said. “In some ways I think it’s better to wait until after the election.”

Trump followed that up Wednesday by saying the talks were going “very well.”

Futures prices on some crops such as soybeans have held firm on investors’ optimism for a deal, but that’s of little comfort to farmers facing what could be another long year of trade tensions between the U.S. and China.

“2020 is going to be a critical year for many farmers because bankers are running out of options,” said John Blanchfield, owner of Agricultural Banking Advisory Services in Damascus, Md.

Farmers typically go into the winter months shoring up their books and using revenue from their harvests to pay down loans taken out earlier in the year to cover planting costs. But more often farmers are having to tap sources of equity, like selling land, to meet their obligations and take on more debt for the next year’s crop.

The U.S. Department of Agriculture predicted in late November that net farm income will climb 10% this year to $92.5 billion, but almost half of the profits are expected to come from bailout checks, crop insurance payouts from historically bad weather across the Midwest and other “off-farm” income.

More alarming is the level of debt farmers are carrying. The USDA forecasts that farms will carry about $415.4 billion in total debt this year, the highest amount since the farming crisis in the 1980s and up more than 30% from 10 years ago.

Farmer Mac Economist Jackson Takach said at an American Bankers Association conference in October that historically low interest rates have provided some relief to farms for now.

When debt levels were last this high in the 1980s, 33 cents of every dollar earned on the farm went to cover borrowing costs, compared with 13 cents today, Takach said.

Iowa State University researchers said in a study published in October that 44% of farmers had “vulnerable liquidity” and were struggling to cover costs at the end of 2018, up from 31% four years before.

Alejandro Plastina, an assistant professor and extension economist at Iowa State, said a new round of bailouts from the USDA “will certainly help mitigate liquidity gaps this year, but the question remains on the sustainability of these payments through time.”

Farmers and their lenders are beginning to bank on a fresh round of checks in the mail from the USDA, which has already set aside $28 billion in trade assistance to farmers over the last two years.

“Visions of another round of payments are dancing in the heads of producers, and by extension, in the heads of their bankers,” Blanchfield said. “The federal government has stepped up with some serious cash in 2019 and that is helping tremendously to keep farmers farming and ag bankers banking.”

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