No farm crisis yet, but situation worsening, expert says

Distress in the nation’s farm country continues to grow, according to a twice-a-year survey of farm lenders.

The 2016 Fall Agricultural Lender Survey by Kansas State University and the University of Georgia shows that farmers are seeing less cash flow, more short-term borrowing to operate, more debt and falling values for their collateral, particularly land.

The percentage of bad loans is still small but rising and is soon to be made worse by rising interest rates. More than half the bankers surveyed expect the number of bad loans to grow in both the next year and in the next two to five years.

It’s not yet a crisis, but the situation is certainly moving in that direction, said Allen Featherstone, head of K-State’s Department of Agricultural Economics. He said futures markets are indicating that prices for agricultural commodities will remain low worldwide over at least the next three years.

“Is it a crisis? No, but certainly there is more difficulty there with the tightness,” Featherstone said. “It is very important that producers continue to plan for the future. They must look out two to three years, and the decisions they make will determine whether they make it.”

The nation’s farmers enjoyed about five years of very strong and profitable crop prices and a few years of very strong livestock prices, but that ended in late 2014 and early 2015. Since then, farmers have produced bountifully – so much so that retail food prices have fallen – but have been punished by low prices in the market.

Farmers depend on borrowing to plant and operate, which they repay when they sell their crops. One of the big drags on farm financing is falling farmland values, he said. Two-thirds of the bankers expected land prices to keep falling and be lower in five years than they are now.

“The land serves as collateral for loans, and when the value is decreasing, it does provide difficulty in the ability to obtain financing,” Featherstone said. “The other significance is psychological. When you have an asset that your retirement is built on and it’s going down, that creates an overall pessimism, and you wonder whether you are in the right field.”

Featherstone said the key to minimizing damage is farmers’ ability to manage very conservatively and their continuing ability to access credit until prices turn back up in a few years.

“What concerns me is the possibility of financial institutions making credit more difficult to get,” Featherstone said. “That’s when you have farmers having to start selling assets – and, if that happens on a large scale, those asset prices will plummet. That is when catastrophe happens.”

It’s a smaller version of what the federal government was able to prevent in 2008 and 2009 by injecting huge amounts of money into the financial system to maintain credit and bolster asset prices.

The good news, Featherstone said, is that the long run still looks favorable for American farmers with population growth around the world. It’s just a matter of weathering the short- and medium-term price collapse.

This story was originally published December 22, 2016 at 3:18 PM with the headline "No farm crisis yet, but situation worsening, expert says."