Farm income is stagnant at the same time that farmers and ranchers across the country are borrowing larger amounts of money and paying sharply higher interest rates on the loans, said the Kansas City Federal Reserve Bank. “Large loans drove the increase in farm lending, which may heighten concerns about cash flow in 2018.”
More than half of the loans issued in the closing three months of 2017 were so-called operating loans, which allow producers to pay bills while waiting for income from crops or livestock. “Rates on loans used to finance current operating expenses increased nearly a full percent, from 3.7 percent in 2016 to 4.5 percent in the fourth quarter of 2017,” said the quarterly Ag Finance Databook. “For the first time since 2014, more loans were issued with interest rates greater than 6 percent than loans with rates of 3 percent or less.”
More than 70 percent of the lending in operating loans in late 2017 was tied to loans of $100,000 or more, “high compared to previous decades,” said the regional Fed. “The average size of operating loans grew in every quarter of 2017.”
With farmers carrying more debt and interest rates on the rise, “leverage and liquidity may remain a concern in 2018,” said the Kansas City Fed. “Still, delinquency rates have remained low and the value of farm real estate has continued to support farm-sector balance sheets as spring planting decisions approach.”
The USDA is due to forecast 2018 farm income on Wednesday, with few reasons to expect dramatic change from last year, when it stabilized after a three-year plunge. Net cash farm income — a measure of liquidity — was the lowest since 2010. USDA projections call for large crops and lackluster market prices this year. Production costs remain high and margins are low. University of Illinois economist Gary Schnitkey says many farmers will need above-average yields just to break even this year.
“Either higher prices or higher yields are needed for positive cash flows,” wrote Schnitkey at farmdoc Daily. “Time will tell. Still, it is a rather uncomfortable position to be in, where realistic yield and price expectations result in very low incomes.” With average yields on highly productive land, farmers would need to sell corn for an average $3.97 a bushel and soybeans for $9.85 a bushel to break even, Schnitkey calculated. But “current fall delivery bids are near $3.60 per bushel for corn and $9.60 per bushel for soybeans.” Higher-than-expected yields rescued many growers in 2016 and 2017.
Although the farm economy “has remained relatively steady, further increases in loan obligations could stretch borrowers’ repayment capacity in the coming year,” he wrote.
Delinquency rates on farm loans have remained low despite the abrupt decline in farm income, running at 2 percent, which is lower than the delinquency on all bank loans. In addition, few banks report troublesome levels of nonperforming ag loans. Farmland prices have remained stable overall, important because land accounts for 80 percent of farm assets.
“In the Corn Belt and southern Plains states, farmland values increased slightly or remained steady compared with a year ago. In the mid- to upper-Plains states, farmland values declined slighty, most notably in Nebraska, where farmland values fell 6 percent from the third quarter of 2106,” said the Databook.