Despite the government's 'advice' to young debt-laden students [6], the tragedy of the American farmer continues [7] with worryingly pessimistic views on the future of the industry. With farmland prices falling for the first time in almost 30 years, credit conditions are weakening dramatically and the Kansas City Fed warns [8] that persistently low crop prices and high input costs reduced profit margins and increased concerns about future loan repayment capacity, and JPMorgan concludes, the industry is currently in dire straits with the potential for a liquidity crunch for farmers into 2016.
Not so long ago, US farmland - whose prices were until recently rising exponentially - was considered by many to be the next asset bubble [9]. Then, almost overnight, the fairytale ended, and as reported in February, US farmland saw its first price drop since 1986 [10].
[11]
Looking ahead, very few bankers expect price appreciation and more than a quarter of survey respondents expect cropland values to decline further in the next three months.
And now, The Kansas City Fed warns that Agricultural credit conditions are worsening rapidly...
Credit conditions in the Federal Reserve’s Tenth District weakened as farm income declined further in the first quarter of 2015. Persistently low crop prices and high input costs reduced profit margins and increased concerns about future loan repayment capacity. Funds were available to meet historically high loan demand, but loan repayment rates dropped considerably. Although profit margins in the livestock industry have remained stable, most bankers do not expect farm income or credit conditions to improve in the next three months.
[12]
On a more regional level, farm income declined in all District states except Oklahoma. In Oklahoma, farm income has steadily improved over the last three years due to revenue from mineral rights and cattle production but remained unchanged in the first quarter of 2015
[13]
Strains on the farm economy have begun to affect the overall economic outlook in some states. Through 2014, growth in per capita personal income was notably smaller in states most heavily concentrated in crop production.
Ninety-four percent of survey respondents expect farm income to remain the same or decline further in the next three months. Additional declines in farm income could continue to create economic challenges in states heavily dependent on crops.
Loan Demand is surging... (to replace income's collapse or roll old debt)
The continued decline in farm income boosted demand for new loans as well as renewals and extensions on existing loans. During years of historically high farm income, some farmers were able to self-finance. However, as working capital has declined due to high production costs and lower crop revenues, more producers have needed external financing to pay for operating expenses and capital purchases. Loan demand was also supported by livestock loans on feeder cattle, which still command historically high prices. In fact, demand for non-real estate farm loans increased across all District states in the first quarter and is expected to remain elevated over the next three months.
If expectations are met, the survey measure of loan demand would be the highest since the survey began in 1980.
[14]
And paying back loans is slumping...
Alongside reduced farm income and higher loan demand, loan repayment rates have declined significantly.
Bankers also expressed concerns over increased debt-to-asset ratios, especially for younger farmers with high borrowing needs.
As The Kansas City Fed concludes... [8]
Low crop prices placed added stress on net farm incomes and contributed to weaker credit conditions in the first quarter. As farm incomes fell, cropland values moderated and more producers depended on financing to cover operating expenses.
Sufficient funds were available to meet increases in loan demand, but declines in repayment rates as well as slight increases in carry-over debt, collateral requirements and loan renewals and extensions suggest that credit quality may become more of a concern moving forward.
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All of which is summed up ominously by JPMorgan, writing in a downgrade not for Deere, that...
We recently spent some time in the Midwest meeting various agriculture industry participants including dealers, farmers and industry experts. We believe it was clear from what we heard that the industry is currently in dire straits with the potential for a liquidity crunch for farmers into 2016.
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Source: JPMorgan, Kansas City Fed, Bloomberg
