Well-Known Economist Dubs Current Agriculture Recession "The Grinder"

Dr. David Kohl says the current economic reset is called "the grinder," impacting both the financial and mental state of farmers. ( Farm Journal )

It's the twists and turns that come with farming causing a tightening of balance sheets on farms across the country.

“I think you're going to see a decline this year,” said Kris Kaven, a farmer in Nebraska. “Even if our yields trend higher, there will be a decline. I think everybody is tightening their belts a little bit.”

Kaven says he's not making any big changes to the farm as neighbors are also sticking with the status quo in order to withstand tough economic times.

“We've been in a six-year agriculture economic reset,” said David Kohl, professor emeritus, Virigina Tech University. “In the 1980s it was like our curveball dropped off the table and slowly came back after four years. This one I call the “grinder,” and it's having a real impact not only on the financial, but also the emotions of agriculture producers out there.

The bleak picture is eating into both the mental and financial state of farmers. Creighton University's August Rural Mainstreet Index (RMI) revealed a third of ag bankers are starting to turn down more ag loans.

“I wouldn't say we're declining more loans,” said Archie Brown, president of First Financial Bank. “We're working much more closely with our borrowers.”

Alan Hoskins of American Farm Mortgage said while he's not seeing a big uptick in delinquency rates today, it could become a reality next spring.

“I would anticipate on the cash grains side, delinquencies may not start showing its head until February, March of next year.”

University of Missouri’s Pat Westhoff said the tariff relief aid payments through the Market Facilitation Program (MFP) aren't even enough to make all producers whole today.

“Even with the payments that farmers will get from the market facilitation program, it’s not enough to make up for those lost market receipts,” said Westhoff.

Bountiful bushels are leading some corn farmers to better margins this year.

“If yields prove to be as high as they’re currently being estimated by USDA, you could actually see an increase in returns to corn producers, for example this year,” said Westhoff. “Corn prices are currently expected to be about a dime higher than last year, and with a big crop as well, that could actually mean more receipts to corn farmers.

Kohl said beyond production, he's started analyzing what some producers are doing to fare better than others.

“What we're finding is a certain group of producers are getting a higher percentage of the income, and those people generally have a higher business IQ,” said Kohl.

More than just a keen sense of business, it's also those holding on to owned land that are witnessing better returns.

“We're six years in on this one thing that's holding us up is our land values,” said Kohl. “If land values start coming off, we could be in some serious trouble. Think about this – land is $2.8 trillion of the $3.5 trillion farm balance sheet. So, it's 81 percent of the balance sheet, and so it still gives producers the option to refinance.”

From an ag lenders’ view, Hoskins said there are two main groups of farmers handling the headwinds best.

“Having a good handle on where they are financially, having a good working capital, understanding their cash flow,” said Hoskins.

The second are producers who had a good marketing plan, able to sell grain and put profits on the books. On the other side, dairy producers seem to be struggling the most.

“Obviously they have more operating cycles per year than the tradition grain farm, so they feel the pain quicker,” said Hoskins. “Dairy has been depressed longer than what we've seen on the corn and bean side.”

Brown said each year, First Financial does a stress test with its ag portfolio, and in every situation, communication is key.

“The biggest thing is come in, lay out all the cards, help the banker really understand what's happening with their operation, because there may be some solutions - depending on how much debts already on the balance sheet, what the assets are - there may be some solutions to work through some things over a longer period,” said Brown.

He said those conversations can often lead to viable solutions.

“Maybe they spent some money on equipment out of cash, and we can turn around and say ‘no, let's put that on a term loan and put some cash back into the farm,” said Brown. “It's those kinds of things we can do, but it starts with a conversation coming to the bank.”

Hoskins agreed, saying as farmers mentally and physically prepare for conversations this fall, don't go into those talks with any fear.

“I think they should prepare by number 1, having numbers ready to talk about, and number 2, and more importantly, not fearing the conversation. it should not be an adversarial situation,” said Hoskins. “It should be the case of a producer talking to their lender in the form of an advisor.”

He says a lender should be a partner, not an enemy.

“Don't assume that your lender is the only lender that exists,” said Hoskins. “As the case in most situations, get a second opinion or a third opinion, because different institutions have different philosophies.”

As farmers harvest another year's crop, 2019 may be more of the same...

“In our baseline update that we did in august based on the current situation we project another year of sub $9 soybean prices in 2019,” said Westhoff.

As price pain pinches farms across the country, these key conversations with bankers this fall may be the lifeline to help farms survive another year.