The Housing Bubble

A report from the Farm Journal. “The farm economy has seen better days. The Federal Reserve Banks in Chicago, Kansas City, and St. Louis have released the results of their quarterly farm economy surveys. The Kansas City District covers the Great Plains. The value of each type of farmland – irrigated, non-irrigated and ranchland – all fell more than 6 percent in the third quarter in comparison to a year ago. The Kansas City Federal Reserve said this decrease was the sharpest year-over-year reduction in the district since the mid 1980s. Cash rents have decreased 10 percent in comparison to 2015.”

“The bankers who responded expect to see weaker demand to acquire farmland this fall and winter compared to 2015, particularly among farmers, but also nonfarm investors. ‘Usually the ag lending season really starts to ramp up between now, harvest, and next spring’s planting,’ said Howard Halderman of Halderman Farm Management and Real Estate. ‘I would anticipate probably the first quarter of ’17, if there are some concerns with ag lenders, they’re going to be talking to their customers and saying, ‘Maybe we need to correct something on the balance sheet and you need to sell something.’”

From Bloomberg. “Betting the farm on record crop, livestock and dairy prices has turned into a losing investment for an expanding share of America’s agricultural heartland. The level of debt to income is the highest in three decades, and growers are increasingly unable to make loan payments. Four years after record U.S. crop and farmland values boosted purchases of land and equipment, a global surplus has sent prices tumbling and farm income into the longest slump since 1977. The Federal Reserve says growers are borrowing more to pay bills, repayment rates are plunging, and the number of bankers requesting additional collateral is the highest in 25 years.”

“Signs of stress are increasing, especially for growers who invested during the boom years. Farm income is down 42% from a record in 2013, government data show, and MetLife Agricultural Finance predicts farmland values will tumble 20% by 2018. ‘Unquestionably, some farmers are not going to make it,’ said Dan Kowalski, director of research at CoBank, an agricultural lending cooperative based in Greenwood Village, Colorado. ‘If they made aggressive growth decisions and did it with debt, that won’t work out well. Credit quality is starting to slip on the farm and smaller agricultural businesses. Bankers are asking if they have the cash flow to pay bills.’”

“The Federal Reserve Bank of Kansas City said last week that rural lenders it surveyed are seeing an erosion of financial health and credit conditions for crop and livestock producers in a seven-state region from Missouri to Colorado. In the third quarter, nearly 30% of the banks reported a significant deterioration of working capital for farmers, about twice as many as the same time in 2015, the Kansas City Fed said in its Nov. 10 report. An index tracking loan-repayment rates in the region was the lowest since 1985.”

“‘Farmers were fairly flush with cash during the really good times,’ said Nathan Kauffman, assistant vice president at the Omaha Branch of the Kansas City Fed. ‘We continue to see deterioration in general in credit conditions, repayment rates, liquidity, farm income, all of those measures that would kind of be wrapped up in the general financial picture for farm borrowers.’”

“About 60% of total farm loans have been used this year to finance operating expenses such as seed, fertilizer, animal feed and land rent, the Kansas City Fed said. That’s the most in more than two decades. Bankers are getting more bearish about the farm economy. The Rural Mainstreet Index created by Creighton University, based on monthly surveys of lenders across 10 Midwestern states, sank in October to the lowest since April 2009. The banks expect about 22% of farmers to suffer negative cash flows in 2016, and some lenders said farm foreclosures will be an increasing challenge.”

“Farmers National Co., which manages more than 5,000 farms and ranches in 24 states and Canada, said its land-auction business is getting a few calls from banks that are demanding borrowers sell acres to reduce debt or pay off loans. ‘I don’t see things turning around until next year, and I’m an optimist,’ said Jim Farrell, the chairman and chief executive officer at Omaha, Nebraska-based Farmers National.”

“With the price of corn down by more than half from its all-time high in 2012, and cattle and hogs plunging more than 38% from records in 2014, net-farm income will slip to a seven-year low of $71.5 billion in 2016, compared with $123.8 billion in 2013, the U.S. Department of Agriculture estimates. Farm debt in 2016 will be five times larger than net income, up for a third straight year and the highest ratio since 1985, USDA data show.”

“The crop glut may be worsening. Inventories of corn, wheat and soybeans will rise 38% to the largest since 1988, the USDA said Nov. 9. An October survey of farmers by Purdue University showed growing pessimism. About 79% of 400 respondents said they expect bad financial times over the next 12 months. According to the University of Illinois, farmers in the central part of the state will lose $28 an acre on corn in 2016, compared with a record $382 profit in 2011, and they will earn $67 on soybeans, down from $229 in 2010.”

From KWQC in Iowa. “A new report from the Association of Equipment Manufacturers shows large farm equipment sales are down nearly 20 percent than what they were during October of 2015. Financial Analyst, Jim Victor, assesses trends in farm equipment sales and said this is a long-standing pattern. ‘Farm equipment sales particularly, large farm equipment sales have been in decline for three years, that trend has been continuing.’”

“Due to low commodity prices, Victor said farmers are not making enough money to spend on new equipment. Rob Ewoldt rents the land that he farms on, and said the cost of paying rent combined with the low commodity prices presents an ongoing challenge. ‘Having to borrow money and not owning land it makes it very difficult right now to try to think about purchasing a $200,000 tractor.’”

The World Herald in Nebraska. “Midwestern and Nebraska farm economics are deteriorating, with crop prices and land values falling as loan defaults rise, conditions serious enough for authorities to invoke the disastrous 1980s. At Omaha-based Farm Credit Services, a member-owned ag lender, loans not being paid as agreed more than doubled to $165 million in the first nine months of the year when compared with the same period in 2015.”

“‘Factors contributing to lower net income included an increase in provision for loan losses, primarily in the grain and beef feedlot industries,’ Farm Credit said in a statement this month. Mark Jensen, chief credit officer at Farm Credit, said in an interview that ‘worldwide supply certainly is having an impact’ by pushing down prices.”

“Mark Jagels, who farms corn and soybeans in Davenport, Nebraska, said so-called input prices for the most part aren’t giving farmers a break, either. ‘Fertilizer is coming down,’ he said. ‘Seed and herbicide not so much.’ Jagels said it is going to be a tough year for farmers without price increases for the grains that mostly go to feed the cattle that provide the meat for a hungry world. He said everyone from ag equipment dealers to small town general stores are hurting because farmers have less cash. ‘They are feeling the crunch, too.’”

“Jagels said his operation is not in peril — he uses modern financial maneuvers such as futures contracts. But not all do. ‘Anyone who was not diligent is on tough times,’ Jagels said of those farmers who spent and borrowed heavily when corn was high.”

“Fred Russell, principal at Fredric E. Russell Investment Management Co. in Tulsa, Oklahoma, said there is always ‘disruption in the market when land values drop and bankruptcies rise.’ Russell said ‘irrigation systems are not cheap’ and the problems farmers are having slice through the whole ag economy. ‘You just hope the bad news is over,’ Russell said.”

From Ag Week. “If the 30 to 50 percent decline in calf prices continues, lenders say there could 15 to 20 percent fewer cow-calf producers in the game. ‘For cattle feeders, it’s going to be a higher percent of people out of the market (who are) not going to be able to buy calves this year,’ says Tom Schmidt, an agricultural commercial loan officer for First Community Credit Union in Bismarck, N.D. ‘That’ll be 30 to 35 percent.’”

“The reason is simple: ‘When you take somebody’s income and cut it nearly in half, it becomes a problem,’ Schmidt says.”

“He was awakened to the fact on Oct. 12, when he attended the season’s first calf sale at Kist Livestock in Mandan, N.D, when some ‘lightweight’ beef-type calves — 350 to 400 pounds — that would have brought $2.50 to $3 per pound two years ago were bringing $1.20 per pound. Some of the dairy-cross calves received 62 cents per pound. ‘That’s hard to make a lot of payments with,’ Schmidt says. ‘There were calves coming into the ring that did not net their owners any money whatsoever.’”

“North Dakota Agriculture Commissioner Doug Goehring says difficulties in the agriculture markets are causing more people to seek assistance with the North Dakota Mediation Service. The program has two full-time staff members, and contracts with 13 others throughout the state, especially on credit counseling. ‘We’ve had some discussions about ramping up our efforts,’ he says, noting that during the 1980s credit crisis there were more than 40 people working with the mediation service.”

“Schmidt loan issues will unfold through the calf selling season, which goes into February and March. It’s not hard to imagine what’s coming. ‘Expenses have not come down; we’re still looking at record-high land rents,’ Schmidt says. ‘It will be more difficult for some folks to pay their lines of credit in full and make their term debt. I expect there will be a huge erosion of equity.’”

“The situation is worsened by prices of other commodities, farm equipment and land. Less value means less to collateralize against. It becomes harder to borrow money. One indicator about how bad things might be are that some land sat idle in 2016 because no renter was willing to pay what a landlord demanded for cash rent. An insurance contact told him about 3,000 acres went unfarmed in the Rugby, N.D., area.”

“Schmidt urges landowners to ‘get a realistic view of what’s happening on the land you’re renting to somebody.’ Compare the rent value to the yield and value of the production. ‘Most farmers are more than willing to show you what they produce off that land — at least get to a realistic point where it’s profitable for the landowner and the farmer — especially if you’re happy with that renter. He cannot lose money and continue to farm. It’s not doable in the long run.’”

“It’s a bit of a replay of the 1980s for Schmidt, 52, who lives near where he grew up in St. Anthony, N.D. During the 1980s farm credit crisis, his father was in the excavating business but ranched on the side. Schmidt bought his first cows when he was 16, and remains in the business himself, although his primary income is banking.”

“There are differences between now and then, he says. In the 1980s new tractors were in the $24,000 range, and today a similar tractor might be $150,000. Diesel was 60 cents per gallon and today it’s $2.39 a gallon. If cash rent was $20 then, today it’s $80. Cattle are still higher priced than they were in the 1980s. In 1982, Schmidt remembers topping the market with 425 pound calves at $64.25 per hundredweight.”

“If producers have to sell land to get out, that is a problem because they lose their borrowing power, he says. ‘I think most people are going to have reassess expenses and land rents. If there’s no profit in it, there’s really no point in having it. This downturn does not appear to be short-term.’”