U.S. Ag Economy: “Mounting Pressure”

Nathan Kauffman, the Assistant Vice President and Omaha Branch Executive at the Federal Reserve Bank of Kansas City, indicated in a recent article (“Mounting Pressure in the U.S. Farm Sector“) that, “U.S. farm income has continued to decline, and is expected to remain low as planting season approaches across the country. The USDA projects real net farm income to be slightly less than a year ago; that projection would mark the second-lowest farm income total in more than 30 years (Chart 1). Prolonged weakness in the farm sector primarily has been driven by several consecutive years of low crop prices and persistently elevated input costs, while recent weakness in the livestock sector also has been a factor.”

Chart 1

The Fed update pointed out that, “The need for financing, and the potential for future financial stress, has continued to increase throughout U.S. farm country. Loan demand in the Tenth District is expected to increase again in the first quarter of 2016, which would be the third consecutive year in which lending needs in the farm sector increased relative to the previous year (Chart 3). Similarly, bankers responding to the fourth quarter survey indicated they expect loan renewals and extensions to continue to accelerate. Conversely, the rate at which loans are repaid at agricultural banks in the District was expected to soften further.

“Persistently strong loan demand at agricultural banks has been coupled with reports of increasing use of USDA Farm Loan Programs through the Farm Service Agency (FSA). From 2013 to 2015, FSA loan volumes increased more than 40 percent (Chart 4).”

Chart 4

The Fed update also noted that, “Despite strong loan demand and an increase in the federal funds target rate in December, interest rates on most farm loans have remained historically low. In fact, interest expenses for U.S. corn producers accounted for only 9 cents per bushel of production in 2014, the latest year for which data are currently available.”

Meanwhile, a recent update by Kevin Patrick, Ryan Kuhns, and Allison Borchers at Choices Online (“Recent Trends in U.S. Farm Income, Wealth, and Financial Health“) stated that, “The continued drop in farm sector income is expected to place downward pressure on farm asset values, which had appreciated during the previous several years. The resulting drop in liquidity from multiple years of lower income is also expected to increase the need for sector borrowing relative to the 2009-2013 period. As a result, the USDA predicts a decline in sector equity and an increase in leverage, which signals the potential building of financial stress within the farm sector. A portion of U.S. farm businesses are highly leveraged and are at increased risk of default. While measures of financial health are worsening relative to the profitable 2009-2013 period, they remain better than historic averages.”

And Rick Barrett reported in yesterday’s Milwaukee Journal Sentinel that, “Carrie Mess, like most dairy farmers, is losing money every time the cows are milked on her farm near Watertown.

“As farmers gear up for spring planting, those who sell crops on the commodities markets stand to lose buckets of money from low prices that are beyond their control.

“Simply put, what many farmers are paid for milk, grain or livestock now isn’t enough to cover their expenses. They’re taking out loans and tapping savings to remain in business, going to work every day knowing that it’s costing them money.”

With respect to other potential impacts of a slumping U.S. ag economy, the AP reported today that, “Kansas farm co-ops are feeling pressure to merge as shrinking farm incomes have producers looking for ways to cut their costs.

“In about six weeks, Farmers Cooperative Elevator in Garden Plain will vote on whether to merge with co-ops in Anthony and Kiowa. Andale Farmers Co-op voted in December to merge with Kanza Co-op, a large operation based in the Pratt County town of Iuka.”

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