Issues Impacting the Ag Economy: Farm Loan Funds Running Short– Production Costs, and Revenue-Based Crop Insurance

Reuters writer¬†P.J. Huffstutter reported yesterday that, “The U.S. government’s $2.65 billion operating loan program to help farmers keep their businesses going has already run out of cash, as requests for federal financial assistance grow amid the worst agricultural downturn in more than a decade, U.S. officials told Reuters on Monday.

“As a result, the U.S. Department of Agriculture (USDA) is looking for other money sources ‘to help bridge the gap in farm operating loans as much as possible until additional funds are made available, either this year or in the next fiscal year,’ the agency said.

“The agency declined to say what other funding it was hoping to leverage for assistance.”

Ms. Huffstutter explained that, “Such FSA loan guarantees and direct loans are often considered to be loans of last resort, say banking experts. Without the financial support, some farmers may struggle to survive until the next cash injection in the fall, say rural economy experts.

Last month, the USDA’s Farm Service Agency (FSA) told Reuters it had expected funding for these loans or guarantees to be depleted before the program restarts Oct. 1.

“As the rural sector struggles with low commodity prices and mounting trade competition, U.S. grain farmers are increasingly relying on the FSA for loan assistance. Agricultural lenders, too, are turning to the agency to help guarantee the loans they are issuing to farmers – whether for operational or real estate needs.”

Meanwhile, with respect to farm operating costs, University of Illinois agricultural economist Gary Schnitkey indicated yesterday at the farmdoc daily blog (“Growth in Crop Costs and Cash Rents“) that, “Crop costs, which include seed, pesticide, and fertilizer costs, have grown more in recent years than have cash rents. Between 2014 and 2015, costs did decline, with most of the reductions coming from cash rents and fertilizer costs. Seed and pesticide costs have not decreased much. Continuing cost cuts are needed, particularly as Agricultural Risk Coverage (ARC) payments likely decrease for the 2017 year.”

More specifically on the issue of potential federal revenue enhancements, DTN Executive Editor¬†Marcia Taylor reported yesterday that, “All signs point to the largest-ever corn crop in history this fall and the third year in a row of plunging farm incomes. But with prices potentially tumbling to $3 by harvest, corn growers with high levels of revenue-based crop insurance could buffer some of the price damage. In fact, many corn growers could trigger 2016 crop insurance payouts with no yield loss.

“Producers sometimes forget revenue-based crop insurance protects against a growing-season price collapse as well as sub-par yields, pointed out Jason Alexander, vice president of crop insurance for Louisville-based Farm Credit Mid-America. Since the Risk Management Agency set the spring guaranteed price for corn at $3.86 per bushel on March 1, prices have fallen to about $3.40 and could bottom near $3 by harvest, many commodity analysts now say.”

Ms. Taylor indicated that, “This is a good time of year to be in contact with your agent and assess your coverage, [Alexander] added. Some isolated parts of Kentucky, Ohio, Tennessee and Michigan could suffer yield damage. ‘But even if you expect an average crop year or even a decent crop, and prices are heading lower, ask what will it do to your bottom line,’ he said. ‘Will you have a claim or not?‘”

The DTN article added that, “DTN Analyst Todd Hultman noted Dec corn closed at $3.41 1/4 Monday, not very far from $3 and certainly within striking distance this fall, especially if the weather continues to provide good crop conditions. ‘Rains in July have been widespread and will likely give us a record crop this fall, possibly near 15 billion bushels,’ Hultman said. ‘With that much production likely, corn prices will have difficulty finding support, at least until harvest time. That just makes Dec corn prices near $3 a reasonable guess this fall.’

“University of Illinois economist Gary Schnitkey echoed that assessment. ‘Right now the market is expecting trendline corn yields, which would produce the largest crop ever in the U.S. and Dec corn futures are running about $3.40. Anything above trendline yields could send corn to $3 at the time RMA is setting that harvest price.'”

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