It’s not news to you that the ag industry has been in a tight spot financially for the past several years—and 2019 looks to offer more of the same.
“I meet with farmers and I meet with bankers, and they give two different stories of the industry,” says Ernie Goss, Creighton University professor of economics, who runs the Mainstreet Economic Conditions Index. “Bankers are more optimistic as they’re not seeing as much bankruptcy and foreclosure as they might otherwise expect.”
That doesn’t mean farmers are staying in business, though. Unlike the 1980s, more farmers today are choosing to retire instead of filing chapter 12 bankruptcy, says Curt Hudnutt, head of rural business, North America for Rabo AgriFinance.
“We are seeing more loan defaults in the industry as a whole. There’s a little uptick in chapter 12 bankruptcies, but that’s from a low base, and I don’t expect to see anything like what we had in the ’80s,” Hudnutt says.
The most recent Rural Mainstreet Index predicts farm loan defaults will rise by 5% this year. While 2019 might not be as bad as it was nearly
40 years ago, expect it to be harder to gain access to capital, and prepare for interest rate increases.
The Federal Reserve recently raised the interest-rate target range by 25 basis points, with a range from 2.25% to 2.5%, the ninth-highest interest rate increase since 1990.
“Importantly, the Fed indicated they stand ready to raise short-term rates by another one-half of one percentage point in 2019,” Goss says. “Further- more, the Fed intends to continue to sell long-term bonds in its portfolio, thus putting upward pressure on long- term interest rates.”
Ag is at a turning point—it’s either going to get a whole lot better or a whole lot worse. While the Fed has said it will likely increase interest rates three times in 2019, keep an eye on more than just interest rates.
“The factors driving the economy are the Federal Reserve and the new interest rate policy and the value of the U.S. dollar,” Goss says. “Rate hikes increase the price of borrowing and push up the value of the dollar, which makes U.S. ag commodities less competitively priced globally.
“The other factor is the trade skirmishes with China and other nations,” Goss adds. “Soybeans and pork were hit the hardest, and that’s spilling over. The $12 billion provided by the Trump administration [in farmer payments] just isn’t enough.”
While interest rates are on the rise, a trade agreement with China could help propel the ag industry in the right direction, though it might be more gradual than immediate.
“There are some bright spots in what this downturn has done,” says Alan Hoskins, president and CEO of American Farm Mortgage and Financial Services. “Producers understand the importance of a written marketing plan in the success of their operations. Second, producers as a whole do a much better job managing their operation than during the $8 corn era.”
Another potential bright spot: While the 2019 general economy might not be strong as in 2018, the Federal Reserve is still predicting 2.3% growth this year.
Hoskin encourages farmers to keep looking for ways to reduce costs, without hurting their over- all production.
“It’s about how we manage our loss in corn and soybeans. Look for any opportunity to lock in the rally in the market,” Hudnutt says. “Look for any discount you can get on inputs and consider alternative financing programs.”
Now is the time to tighten belts on non-farm assets, Hudnutt adds. “If you’re holding onto real estate or vacation homes, it might be time to look into selling.”
Protect yourself on the production side with crop insurance and be thoughtful about what ground you rent. You need to be willing to walk away when it doesn’t pencil out.
“Look for opportunities; in the past 40 years there has been at least one profitable opportunity every crop year,” Hoskins says. “There will be at least one this year. I know there are a lot of guys with 2018 crop in the bin, but don’t sleep on opportunities to sell some of your 2019 crop at a profitable level because you’re worried about what’s in the bin.”
Farmers who plan now can sidestep some of the financial curve balls 2019 will throw at them. Take actions that will set your farm up for success this coming season and beyond.