farm debt

Farmers and ranchers are taking out fewer loans from agricultural banks, and asking for smaller amounts of money when they need cash to pay for equipment, livestock or day-to-day expenses, said the Federal Reserve in its quarterly Agricultural Finance Databook. "Weaknesses in the sector persisted, continuing to pressure farm cash flows and agricultural credit conditions," reports the Fed.

In an indirect sign of stress in the farm sector, small agricultural banks are making adjustments, such as syndicating loans and charging higher interest rates, to offset risk in the face of high demand for farm loans, said the Federal Reserve in its quarterly Ag Finance Databook. The Fed's Beige Book, meanwhile, said spring floods in the northern Plains and western Corn Belt could put an additional burden on a farm sector coping with low commodity prices.

Farmers typically try to stretch their dollars during the summer in the expectation that payday will arrive with the fall harvest. Not this year. Ag bankers report the largest summertime increase in non-real-estate loan volume in 16 years and it was driven primarily by demand for operating loans to pay day-to-day expenses, said a quarterly Federal Reserve report.

U.S. farm income is higher than expected this year and is regaining its footing after taking a tumble early this decade, said the Agriculture Department on Thursday. Nonetheless, net farm income will be the lowest since 2006, and the debt-to-asset ratio is rising for the sixth year in a row.

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."

After suffering a 31-percent drop in net cash income in three years, the U.S. farm sector will see stable to modestly rising income in coming years, while farmland values will fall 11 percent before leveling off at the end of this decade, says the Food and Agricultural Policy Research Institute. The University of Missouri think tank says farm debt will rise, as will indicators of financial stress, such as the debt-to-asset ratio.

Three years after the collapse of commodity prices, there are only slightly fewer farms in the United States than when the seven-year boom peaked and farm income was record high, according to USDA data. The government estimated there were 2.06 million farms in 2016, down 2 percent from 2013, the same period in which net farm income, a gauge of solvency, plummeted 46 percent.

Weak farm income pulled down farmland values across the Midwest and much of the Plains as 2016 closed and ag bankers expect prices to slide again before the spring planting season, said Federal Reserve banks in Chicago, Kansas City and St. Louis. The Chicago Fed said land values have fallen for three years in a row in its five-state district in the heart of the Corn Belt.

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.

After a review of farm-sector financial indicators, economist Brent Gloy says, "Caution going forward would be appropriate," particularly for operators who are borrowing money. The commonly used debt-to-asset ratio is low, Gloy writes at the Agricultural Economic Insights blog a day before USDA updates its farm-income forecast, but lesser-known yardsticks, such as the debt-service ratio and times-interest-earned ratio "indicate that financial conditions are as poor as any seen for some time."

Persistently weak cash flow has prompted U.S. farmers and ranchers to borrow far more money in short-term operating loans than usual, said the Kansas City Federal Reserve Bank. Loan volume of around $55 billion was 50 percent above the 10-year average, said the bank, while the soft farm economy was pulling down farmland prices throughout the western Corn Belt and Plains.

U.S. farm income plummeted by a combined 31 percent in 2014 and 2015. It will fall again this year, says a USDA forecast, but by a modest 2-3 percent. Large crop-subsidy payments, estimated at $9.5 billion, will buffer a 4-percent drop in livestock receipts and a 1-percent decline in crop receipts.