State of ag lending: ‘It’s not full retrenchment, but it’s close’

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Fewer agricultural loans are being made these days as a combination of a global pandemic and stalled trade negotiations have discouraged farmers and ranchers from taking on more debt and made banks uneasy about extending more credit.

With no trade deal with China in sight and Congress continuing to haggle over the next coronavirus relief package, many farmers are thinking twice about taking out working capital loans out of fear they may not be able to pay them back. Meanwhile, ag lenders — many of which are already struggling — are advising some clients not to borrow and instead focus on building up their capital reserves to gird for a prolonged economic slowdown.

"Many lenders are speaking with farmers about building working capital, being mindful of costs and scrutinizing investments,” said Brian Briggeman, a professor in the department of agricultural economics at Kansas State University and a former economist at the Federal Reserve Bank of Kansas City. “It’s not full retrenchment mode, but it’s close.”

Excluding real estate loans, total farm debt in the U.S. fell to $95.5 billion, down more than 12% from the same period one year ago, according to data released by Kansas City Fed. It marked the fourth straight quarter of year-over-year declines.

Meanwhile, about 1.68% of non-real-estate farm loans were considered nonperforming in the first quarter, the highest level since 2011, according to the Kansas City Fed data. There have been fewer farmers filing for bankruptcy so far this year compared with last year, but that’s largely because government payments tied to the trade war with China and the coronavirus outbreak have kept many farms afloat, observers said.

American Farm Bureau Federation President Zippy Duvall said in a statement Tuesday that the latest bankruptcy data shows how vital the first coronavirus relief package in particular was in helping farmers and ranchers weather the weakened demand for their products. He called on Congress to extend more relief to the ag industry, which has seen sales to buyers such as school systems and restaurants plummet.

“The economic impact of the pandemic is far from over,” he said. “It’s imperative that Congress addresses the challenges facing farmers and ranchers in current coronavirus relief legislation.”

The future is so uncertain that the agriculture lending unit for Rabobank North America, the U.S. unit owned by the Dutch banking giant, has decided to largely stick to writing loans for existing borrowers only instead of new clients as a way to avoid any further risk, said Shawn Smeins, deputy head of the company’s rural business.

“Ag lending today is pretty tough,” Smeins said. “Lenders ... are being a little bit more cautious.”

Grain and corn farmers have been hit particularly hard because of the lack of demand for their crops abroad. Corn prices have fallen so low, around $3 per bushel, according to futures market trading, that it’s no longer profitable for some farmers to grow it.

“There’s a lot of nervousness because they’re just below the cost of production,” Bob Hartwig, legal counsel and agriculture liaison with the Iowa Bankers Association, said after a call with members Tuesday.

Since the trade war with China started in early 2019, the government has rushed to support farmers and ranchers and, by extension, the banks that hold their debt. More than $14.4 billion in trade relief money has been sent out to farmers since May 2019, according to the U.S. Department of Agriculture.

Another $16 billion has been made available to farmers through the Coronavirus Food Assistance Program to offset a drop-off in demand for crops and livestock. And $7.9 billion in Paycheck Protection Program loans have gone to the agriculture, forestry, hunting and fishing industries as of June 30, according to the Treasury Department.

The American Farm Bureau Federation estimated that roughly 40% of farm income last year came from government assistance and crop insurance.

The Republican version of the new virus relief package includes another $20 billion in farm aid that could be doled out by the U.S. Department of Agriculture, but talks are continuing. Rabobank underwriters no longer include government checks in their calculations when determining whether to write a loan, Smeins said.

“It’s just gravy if it does come,” Smeins said.

Key fixes, like a permanent trade deal with China to increase crop buying abroad, remain elusive, creating more angst among ag lenders.

"We have a leader of the administration who has tactics that other leaders aren’t used to seeing,” Smeins said. “Maybe they’ll do great, or maybe they’ll fall flat on their face. I don't want to get into the right or wrong, but there’s a lot of uneasiness."

The art of writing agriculture loans has been notoriously opaque because of a lack of crop-producer-level data, which has made the current market even more complicated to maneuver in. Rabobank has recently partnered with the data company Conservis by lending finance analysts and researchers to help expand the amount of real-time data that can be made available to ag lenders.

“We can see trends in the farming operation before the farmer sees them and get them financing before they know they need it,” Smeins said.

Another key change in the meantime could come in the form of making it easier for more lenders to write government-backed loans through the Farm Service Agency, an arm of the USDA.

Groups like the Iowa Bankers Association have floated the idea with policymakers, but it’s unclear when any changes could be made. Hartwig said lenders are hoping the government will insure more farm loans next year, relieving them of some of the risk.

“That will help more farmers stay on the farm,” Hartwig said.

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