“Weaker farm income and depressed crop prices have forced operators to burn through working capital and increase their usage of operating loan lines,” says the Kansas City Federal Reserve Bank. Demand for short-term loans has increased steadily at farm banks across the nation since spring 2013, while farm income has plunged in the past two years. The ratio of operating loans to net farm income surged to .99 this year “and could soon eclipse the 1.0 mark for the first time since the early 1980s,” just before the agricultural recession of the mid-1980s.
“A ratio above 1.0 is a level where producers ultimately need to draw on other income sources or accumulated wealth to pay for recurring operating costs,” write Nathan Kaufman, assistant vice president of the Kansas City Fed, and Matt Clark, assistant economist for the regional Fed. Since the mid-1980s, the ratio of operating loans to farm income has averaged 0.54. “This sign of an increasing debt burden is also consistent with the USDA’s expectation of a slight uptick in both debt-to-equity and debt-to-asset ratios.”
There seems little likelihood of higher commodity prices before next spring barring a sudden increase in demand, which diminishes the prospects for higher revenue for producers, says the Kansas City Fed. “Many producers have remained in a financially sound position through 2015 but a prolonged downturn through 2016 could start to challenge some of those financial position.”