A Crop of Confusion
New farm bill injects extra complications into agricultural lending
By Howard Schneider
Agricultural lenders found their discussions with America's farmers more complex as they entered the 2015 planting season. Commodity food prices have dropped sharply in the past 12 months—although from some of the highest levels seen in years.
Soybean prices have fallen 23 percent over the past year, and winter wheat values dropped 12 percent just in the month of January. To further emphasize the new low-price era farmers face in addition to other challenges, during a hearing in February on the rural economy, House Agriculture Committee Chairman Michael Conaway noted that the new farm bill, the Agricultural Act of 2014, had just reached its one-year anniversary.
"Economic conditions for many producers have changed dramatically since then, with commodity markets plunging by up to 50 percent," he pointed out. "Drought and other natural disasters also resulted in disaster declarations in 33 states across the country last year. The net effect was an estimated 43 percent decline in net farm income over the past two years."
Uncertainty is added to this environment due to basic changes enacted in the new farm bill. Direct payments—a farm bill feature since 1995—were eliminated with this legislation. Growers must choose between participating in one of two new federal support programs. Two versions of Agricultural Risk Coverage are based on local agricultural revenues, while Price Loss Coverage employs national commodity prices similar to the target prices in previous farm bills.
Farmers had to select which program to sign up for by March 31, 2015. Additionally, those decisions stay in effect through the 2018 harvest. It's not an easy choice to make, explains Kent Thiesse, a vice president and agricultural loan officer at MinnStar Bank, a $120 million-asset lender in Lake Crystal, Minn. He calls it "a guessing game," because payments under the programs will differ based on future crop prices and yields.
U.S. growers have filled up spreadsheets with projections before selecting one of the farm bill programs. "Everyone's situation is different," notes Danen Lodoen, a loan officer at State Bank of Bottineau, a $68 million-asset community bank in Bottineau, N.D.
Farm payment flow
Yet community banks factor in anticipated farm payments when making lending decisions. More than 90 percent of Thiesse's borrowers are in the federal program, so those payments are part of a farm's cash flow.
Under the direct payment program farmers knew what they'd receive in federal support. But remittances under the new law aren't finalized until the year after a crop is produced, notes Thiesse. Farmers will receive payment on their 2014 harvest this coming October.
Thiesse expects farmers and their bankers "will feel more comfortable as we get experience with the programs." He adds that in the past federal payments have accounted for more than half of farm net cash income in difficult years. But in recent years commodity prices have been high, and farm payments amounted to less than 10 percent of income for most farmers.
Today many farm operations have borrowing capacity, after several years of rising crop prices. But those who are renting land have higher operating costs and greater financial risk.
Farmers working on leased land "are extremely nervous," says Al Braden, vice president and commercial loan officer at Cattaraugus County Bank, a $200 million-asset community bank in Little Valley, N.Y. He adds that lower prices for corn, soybeans and wheat are making some farm operations in western New York State unprofitable.
A typical farm in northern North Dakota has a revolving credit line of close to $1 million, relates Lodoen, which is used to purchase seed, fertilizer and crop insurance each planting season. Loans to buy farm equipment also are made on five- to seven-year terms at State Bank.
Lodoen and other community bankers are forecasting tighter cash flows in 2015 as they renew farm credit lines. Lower fuel prices help, but other costs aren't coming down. A farmer may spend $16 per acre on gasoline but $80 for seed and $70 on fertilizer, he comments.
Lodoen talks with borrowers about ways to cut costs and boost farm efficiency. "We won't see as much equipment getting bought." But unless expenses drop just as crop prices have, "we need moisture and big yields to make it work," he declares. Below-average yields will put stress on borrowers "even with crop payments" from the farm bill, Thiesse agrees. Some farmers are renting out barns to livestock operations. They obtain cash flow, along with manure that reduces their fertilizer cost.
Lower farmland values are another factor making bankers conservative about lending to growers. Acreage prices have dropped 10 to 20 percent over the past two years in the corn belt, Thiesse says. Community bankers "are building in more of a cushion" when lending to farmers this year, he adds. Some households are being encouraged to look for ways to boost their non-farm income or reduce living costs.
Community banks are facing additional agricultural lending challenges. Braden says some ag accounts are lost because community banks can't match the rates provided by Farm Credit System lenders. Mark Scanlan, ICBA's senior vice president of agriculture and rural policy, points out that, "Farm Credit benefits from having a lower cost of funds due to its status as a government-sponsored enterprise. FCS lenders also enjoy various tax exemptions that result in FCS lenders paying less than a 5 percent effective tax rate."
Scanlan urges community bankers to keep pressure on their members of Congress to prevent any future expansions of the Farm Credit System and to look at the fixed-rate products offered by Farmer Mac as a way to compete with government-advantaged FCS lenders. He adds that under an ICBA-Farmer Mac lending program (www.farmermac.com/lenders/icba) agricultural lenders can offer their farm customers either variable or fixed-rate loans ranging from one year to 25 five years, with amortization periods of up to 30 years.
Lending is more than just quoting rates, however. Advising borrowers and working with them through tough times builds banking relationships that can last for generations. Thiesse is aware he's lending not just to farming operations, but to local families. His goal remains "to help families and be a resource. I want to be part of the solution."
Howard Schneider is a financial writer in California.
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