Recent rallies in the grain market have brought some optimism to economists like Cortney Cowley of the Kansas City Federal Reserve Bank, but those bright spots are still being shadowed by worries about the farm debt situation.
Even with the recent rally, producers in the middle of the country are still concerned, according to Cowley.
“In our district (seven state region in the middle of the U.S.), even though national prices had increased, basis levels were still pretty negative, keeping margins less than breakeven,” said Cowley, speaking on AgriTalk with Mike Adams and Landowner newsletter editor Mike Walsten about the current credit situation and how cash rents can affect farmers’ ability to borrow money.
She said that demand is up for new loans, renewals and extensions, and that many bankers are requiring increased collateral.
“In (the first quarter of 2016), we saw a pretty dramatic increase, so we think bankers are looking for a way to mitigate risk and cover themselves,” Cowley explained. “Things can change very quickly, so even though we haven’t seen a lot of delinquencies yet, we have seen some declines in the ability to pay loans or payment rates, which has been shown as an indicator for delinquencies down the road.”
She said that given the data recently released by the Federal Reserve, it seems that there would be more discussion about these concerns in farm country than appears to be the case.
“Throughout 2015 we heard crop prices were down, but there was a lot of built-up wealth through the good times, so most of what we were seeing was an accumulation of debt for marginal producers needing more debt (as well as) for the better producers who didn’t have a need for debt in good times needing some to cover operational expenses,” Cowley explained. “We haven’t seen an increase in delinquencies or classifieds yet.”
Part of the challenge may be the cash rent situation.
While average cash rents are coming down 5% to 10% across the Corn Belt, Walsten said there could still be some cases where banks refuse to operating loans because a producer’s costs are too high and commodity prices are too low.
“It’s going to be the farmer with 50-50 owned and rented land that will be able to keep it together,” Walsten said. “If you have a high percentage of cash rent, you’re too exposed in a market (grain) that crashes so suddenly.”
In terms of cash rents, Walsten did say that the $500 and $600 cash rents are gone, but that the bottom of the cash-rent scale is starting to come up. That’s moderating the overall pace of decline and is tough news for farmers who rent a large percentage of their land.