The third year of weakening U.S. farm income will create “more questions about the ability of some producers to continue to operate after experiencing losses for multiple consecutive years,” says the Kansas Federal Reserve Bank. The sour economy is causing ripple effects in farm towns in the Plains, ag bankers told the regional Fed.
Many producers relied on short-term loans or debt restructuring to get through this year, “but if the outlook for cash flow remains poor during the next loan renewal season, some producers may need to consider more aggressive alternatives to shore up depleted working capital,” wrote assistant vice president Nathan Kaufman of the Kansas City Fed. At mid-year, ag bankers in the Kansas City Fed’s district in the central and southern Plains reported “major” or “severe” repayment problems on more than 7 percent of their agricultural loans, compared to 4 percent in 2015.
Profit margins for corn, soybeans, wheat and cotton dropped sharply since 2013, the final year of the agricultural boom, and are at or below average production costs this year. “Among the major livestock markets (slaughter cattle, cow/calf, dairy and hogs), only profit magins in the hog sector have been positive in 2016 although prices were near break-even toward the end of the third quarter,” said the Kansas City Fed.
Producers have curtailed spending to soften the impact of lower revenue, said the USDA when it updated its farm income estimates in late August; the decline since 2013’s record is not as deep as initially thought but income still would be the lowest since 2009. Corn and wheat prices were at or near 10-year lows this month, said the Kansas City Fed.
Farm subsidy payments will reach $13.8 billion this year, a significant increase, $3 billion, from 2015, Agriculture Secretary Tom Vilsack said last week. Although some measures, such as the debt-to-asset ratio suggest the agricultural sector sits on a strong foundation, “it is clear financial stress is increasing and that some producers are more exposed to financial risk.” They tend to be operators with high costs of production, who rent a large portion of their land or who took out large loans.
With crop prices down, farmers are keeping their wallets in their pockets. “You just really try to get by on what you got,” Kansas farmer Daryl North told Harvest Public Media. “Definitely not buying any new stuff, no new machinery.” North’s attitude is common throughout the Farm Belt.
Carrico Implement, a John Deere dealer in north-central Kansas, is focusing on parts and service rather than selling equipment, said Carrico’s corporate sales manager Alan Fabrizuis. Equipment sales are down 30-40 percent from the peak of the ag boom early this decade, he told Harvest Media.
“Erosion in federal crop insurance guarantees since 2013 is compounding the risks for farm operators during this downturn,” said DTN. As commodity prices fall, so does the cushion provided by crop insurance because most producers buy revenue insurance policies. “Sadly, production costs haven’t retreated nearly as far or as fast as prices, leaving farmers to self-insure those revenue gaps.”