By Elizabeth Williams
DTN Special Correspondent
KANSAS CITY (DTN) -- The winter/spring of 2017 did not see the financial shake-out many financial experts expected after three consecutive years of declining net farm income. In fact, lenders and other ag industry representatives at the Kansas City Federal Reserve Bank's annual Ag Symposium last week were not wringing their hands -- yet.
There are pockets of more severe financial strain, such as dryland wheat country in the western Plains and in the Southeast U.S., though lenders at the symposium did not report an excessive amount of troubled loans.
"We've had to rely on equipment equity and land equity as farmers re-balanced their loan portfolios [this winter]," reported Rob Keil, senior vice president and chief credit officer with Dacotah Bank in Aberdeen, South Dakota. "Working capital has disappeared," said Keil, "as we are in our fourth year of [cash flow] bleeding."
LAND VALUES SUPPORT LOANS
Land values are staying relatively stable -- on highly productive ground. For example, central Iowa land sales in May brought $10,000 to $10,500 per acre on highly productive (CSR2 above 90) 80-acre parcels, according to Peoples Company, based in Clive, Iowa. This, despite farm incomes that are about half of their peak of 2013, said Nate Kauffman, assistant vice president and Omaha Branch Executive, Federal Reserve Bank of Kansas City.
Kauffman reported, "Despite increases in financing needs by farmers and ranchers, we're not seeing delinquencies rising much" in the 10th Federal Reserve Bank district. That district covers Nebraska, Kansas, Oklahoma, Wyoming, Colorado and parts of Missouri and New Mexico.
"Soybeans paid the bills last year," noted White Cloud, Kansas, farmer Ken McCauley, president of the Kansas Corn Growers. "As for corn, I'm still trying to sell last year's crop."
Lower input expenses helped, McCauley said. "Fertilizer was the big one; seed costs were stable for a change, and cash rents declined some. Our cash input costs this year went down $50 an acre compared to last year. That really helped, especially with our banker," McCauley added.
McCauley reported a northeast Kansas row-crop farm sale of $7,600 per acre, down from peak levels of $10,000 per acre, which is relatively strong for his area.
Jim Farrell, president of Farmers National Company based in Omaha, Nebraska, agreed that row-crop farmers dodged a bullet last year. "Soybeans made money last year, and a lot of 2016 grain still has to be sold. We didn't see very many financial issues crop up over the winter. But there is definitely some troubled pockets."
Farmers National Company provides farm/ranch management and real estate services in 28 states.
"Dryland wheat areas did not have a good crop, subsequently land values have deteriorated," Farrell said. "It is hard to sell dryland wheat ground right now in many areas. It could be a stressful fall."
In cattle country, the outlook is more upbeat. Cattle prices have recovered. In fact, "the cow/calf, stockers and feeders are all making money now. That doesn't happen very often," explained Todd Welch with the Bank of Kremlin in Kremlin, Oklahoma.
That scenario could change later in the year if feedlot placements continue to increase, said John Harrington, DTN livestock analyst.
"My guess is relatively aggressive placement activity will continue through the balance of the summer, setting the stage for much larger beef supplies in the second half of 2017," Harrington said. Solid evidence of ongoing expansion in the pork and poultry sectors means that total meat supplies in 2018 and 2019 will make sustained cattle profits very challenging, he said, without steady growth in domestic and foreign beef demand.
FINANCE MAKEUP CHANGING
Keil, with Dacotah Bank, said 40% of its loan portfolio in North Dakota, South Dakota and western Minnesota is in agricultural loans, making it the 16th largest U.S. ag lender. The makeup of those loans are changing along with the rural economic landscape.
"Ten years ago, a good portion of our operating lines were half a million dollars. Now, that's risen to over $1 million, and some are in the $4 million to $6 million range," said Keil.
The bank is now offering more "inventory notes," versus traditional cash shortfall notes, as producers take longer to market grain.
On the downside, Keil is seeing more cash-flow leverage problems. "Operators who mostly rent their land are more challenged and have fewer options to weather the storm," he said. Keil has also seen some large operations dramatically drop in net worth in the past four years. One 15,000-acre operation saw its net worth fall $4.2 million, a 59% drop in net worth, since 2013; another 8,000-acre operation lost $2.5 million, or 47% of net worth, in the past two years, Keil noted.
The Farm Service Agency guaranteed loan programs have "absolutely been a saving grace for rural banks and young farmers," said Keil, allowing banks to stay with their younger borrowers who don't have the capital to service loans. Farmer Mac has also helped agricultural lenders reduce risk in these tough times. "We're watching these loans carefully," explained Keil. He adds that loan officers are working closely with farm borrowers to cut expenses to the bone and to keep track of where every penny is going.
But bankers are nervous. "At a recent credit conference I attended, the general consensus was a normal crop would produce a stressful year," said Farrell with Farmers National Company. That makes it another year of touch-and-go for ag lenders and their borrowers.
Elizabeth Williams can be reached at firstname.lastname@example.org
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