The U.S. and global economies are stronger, but the sluggish farm economy is starting to draw a little more attention from the Federal Reserve.
Nathan Kauffman, an assistant vice president of the Federal Reserve Bank of Kansas City’s Omaha branch, spends most of his time watching the ag economy. Kauffman, speaking to a group of farmers in downtown Omaha on Thursday, said he will address the Federal Reserve Board of Governors next week to talk about the challenges and risks in the farm sector right now.
“What we’re seeing happening in agriculture … the governors have taken a little more interest, just recognizing there is more risk in the sector today than what there has been in recent years,” Kauffman said.
Crop prices have been consistently low over the last four years but also relatively stable. USDA’s last forecast showed national net farm income at roughly half of 2013 totals. USDA will update those forecasts at the end of the month.
“It’s not all doom and gloom,” Kauffman said. “I think it is recognizing things are stretched for a lot of operations, but I think global demand is strong. It’s not the strength of demand that we have seen in the past, but it is strong.”
People often want to compare the current downturn to the 1980s. Beyond very different dynamics with interest rates, demand for agricultural commodities has remained consistent despite higher global production and stocks in recent years. The demand side is critical as commodities overall remain in an oversupply situation globally.
While hitting individual farms hard, the agricultural downturn has been gradual, overall, in terms of financial stress for farmers and agribusinesses, Kauffman said. “That’s probably an oversimplification to say it’s been gradual because clearly there are operations dealing with things that have been much more difficult,” he added.
Beginning in 2016, Kauffman said bankers began seeing more farmers with carryover debt following two-plus years of low prices. There were tougher conversations during loan-renewal season about cash flow. The large corn and soybean crops helped offset the prices.
“In 2016, the scale of production really helped producers deal with some of the pressure they might have faced from the price side,” Kauffman said.
USDA is still forecasting a large new-corn crop at 14.15 billion bushels, down about 995 million bushels from 2016-17. The new soybean crop is projected at a record 4.38 bb with higher estimated ending stocks — 475 mb compared to 360 million estimated for the old crop, according to the World Agricultural Supply and Demand Estimates.
Most lenders have had at least a few loans this year in which producers had to make some changes to the operation to get a line of credit, Kauffman said. Lenders are still seeing a lot of carryover debt and areas with more average to smaller-sized crops this fall will have more stressed producers financially.
“As we go into 2018, the concerns are very much the same as we had last year,” he said. “We’re still in a low commodity environment. There has been some adjustment on the cost side, but maybe not enough to make things really pencil out in terms of cash flow. I think areas where land is a little bit less productive are maybe more concerning.”
Farm loan delinquency rates are increasing, but that rise has been slow and the delinquencies are still low by historical standards. The default rate on farm loans remains low. “So we’re not seeing a lot of outright defaults on loans,” Kauffman said.
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Another saving grace right now is that farmland values have not fallen as dramatically as expected. Kauffman cites that farmland in Iowa is roughly 25% lower than its peak, and that is probably similar in eastern Nebraska and Illinois. That compares to as much as a 400% increase in prime farmland values from the late 1990s to 2013.
Iowa farmland values actually bumped up 2% in the first quarter of 2017. Nebraska and northern Illinois held steady while land values fell 8% in Kansas and 10% in South Dakota.
“That aspect of land values, I would argue, is still something to watch,” he said. “That’s the area where if we saw some precipitous declines in farmland values, it could present some serious problems.”
Overall debt-to-asset ratios are at 13% for farmers, up from 11% in 2013. Kauffman said if overall farmer debt-to-asset ratios hit 20% or higher, that would start to set off some alarm bells among ag lenders and policymakers.
Moving ahead, Kauffman said there is more attention to possible changes in the next farm bill as lawmakers target 2018 for completion.
“Crop insurance is on the minds of both borrowers and lenders and there is still a lot of discussion to be had on that,” he said.
Regarding the overall economy, Kauffman noted the economic expansion going back to 2009 has had “somewhat sluggish growth at times,” but is still the third-longest economic expansion in the country going back to the 1850s. Unemployment nationally is at 4.3% and wage growth is making some gains, even though that has been sluggish.
Kauffman added that the economy globally is better than many people realize. He cited a recent Wall Street Journal article, noting it’s a rare occurrence that so many countries in the Organization for Economic Cooperation and Development are growing at the same time.
Chris Clayton can be reached at Chris.Clayton@dtn.com
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