DTN Executive Editor Marcia Zarley Taylor reported recently at the Minding Ag’s Business blog that, “Another consecutive year of farm losses is beginning to worry Grain Belt farm lenders. Many thought liquid reserves accumulated during years of peak prices would help crop producers absorb multi-year losses now, but they may have underestimated the length and depth of this downturn.
“No one has a precise handle on the scale of the difficulties, but by mid-year, about 22% of the borrowers in the Kansas City Federal Reserve district were experiencing repayment problems, although only 7% of those were severe.
“A key issue is that much of the liquid wealth that farmers acquired during corn’s boom years will be gone by year-end, some economists now predict. Without a strong financial buffer, some farm operators will need to make serious course corrections to qualify for financing in 2017. That could set the stage for more cost cutting, farmland sales and downsizings in the year ahead.”
The DTN update noted that, “If USDA estimates of a $3.15 per bu. season average cash price for corn materializes, the [Farm Credit Administration] economists believe about 88% of corn farms can cover their operating costs, but a mere 17% are able to cover total costs this season, including land.
“The first item lenders monitor is how much working capital growers hold, in case they need to fund cash shortfalls from operations. Based on Illinois farm business records, University of Illinois economist Gary Schnitkey estimates in a recent farmdoc daily post that most of the extra working capital reserves his state’s farmers built during high-income years from 2007 to 2013 will be depleted by year-end. That would make working capital levels comparable to the low income years of 1996 to 2006.
“That’s not a disaster, but it does make finances fragile for below-average operators. Earlier farmdoc posts show, ‘In 2015 and 2016, [Illinois] working capital reserves were used to fund cash shortfalls coming from operations,’ Schnitkey reports. ‘If prices remain low through 2017, means other than reducing working capital likely will be needed to address cash shortfalls.'”
Ms. Taylor added that, “Evan Hahn, a senior agricultural analyst who covers large farm and agribusiness accounts for Farm Credit Mid-America in southwest Ohio, encourages borrowers to reach out to lenders early.”
