Weathering a Financial Storm

This month, we're midway through farm loan renewal season, according to a farmer friend of mine in southwest Iowa who is on his bank's board of directors. Some borrowers were already approved for credit last fall, and it could be March or April for others, he says.

This is a season of discontent for some.

As 2018 ended, the Federal Reserve Bank of Kansas City reported a "modest deterioration" in farmers' short-term operating funds (or working capital) after it surveyed ag bankers in seven states.

Most of you will get operating loans for this summer, of course. But if your banker is showing some reluctance or skepticism about how you're going to repay 2019 operating credit, you are not alone.

In Kansas, 15% of bank loans were on a watch list, which meant they were "being closely monitored for potential problems," although they still qualify for credit. In Nebraska, the watch list was approaching 20% of loans, according to the Kansas City Fed. That list has grown over the past three years.

The Chicago Federal Reserve Bank, whose district includes Iowa and most of Illinois and Indiana, forecast a hard financial winter, as well. Its survey of bankers predicted that "forced sales or liquidations of farm assets owned by financially distressed farmers were anticipated to increase" over late fall and this winter.

None of this is a shock. Commodity prices and net farm income have plunged since 2013. Last year, even Americans living among skyscrapers knew that trade wars were hammering soybean and pork prices.

So when I went to Omaha last fall for the annual National Agricultural Bankers Conference, I found a few inevitable comparisons with the bad old days of the 1980s farm debt crisis. But I also found a lot of important differences that will affect you and your farm in the coming years.

The most important difference is that many farms are still chugging along with positive margins, even if they are razor thin. That's a contrast with the 1980s, when nearly everyone was hit by low returns, double-digit interest rates at first, then failing lending institutions. (As the farm editor for a newspaper in Nebraska, I covered those painful years. Like everyone else, I don't want to revisit them.)

With some farms adapting to our new normal of low margins, more than one speaker at the American Bankers Association-sponsored gathering sees accelerated consolidation ahead.

Virginia Tech emeritus ag economist Dave Kohl divides farm borrowers into three groups: the 40% who are going to grow, another 40% who've been refinancing debt, and 20% who are, in his words, in "demarket mode."

Kohl's view that some farms continue to do well while others are slowly going out of business was reinforced by data from FINBIN, a farm financial record keeping system used in 11 agricultural states.

The top 20% of FINBIN farms averaged net income above $200,000 in 2017, while the bottom 20% lost nearly $60,000, says Dale Nordquist, assistant director of the University of Minnesota's Center for Farm Financial Management.

Nordquist and his colleagues have tweaked those anonymous farm numbers to try to figure out why some do better than others. Size doesn't guarantee success. Nordquist says larger operations have no great advantage over their neighbors. "We've never seen it in our numbers."

Better marketing helps, but farmers have a tough time doing that consistently. Those who control direct costs do best, he says.

"The low-cost farms always have higher yields," Nordquist says. "From an economic standpoint, it doesn't make a lot of sense to me, but it always comes out that way."

The Omaha meeting convinced me that we have no handy-dandy easy tips for surviving a mess that we've taken four or five years to reach. But there are things each of those three groups of crop farmers might want to consider.

For the top 40%

One key question here is where are land prices headed? In the 1980s, I remember survivors waiting until late in the decade to pick up some bargains. That may not work this time. The consensus in Omaha is for fairly stable land prices.

• Baby boomers who own their land may not sell it quickly. To Kohl, that's a group worth watching.
• Smaller farms are subsidizing working capital with off-farm income, according to analysis of FINBIN records.
• Outside investors may continue to own or buy land, especially if stocks and urban real estate stall.
• An argument for waiting is if interest rates rise enough to depress land prices. No one expects the Federal Reserve to repeat what led to the 1980s crash.
• Obviously, this doesn't apply to rented land. My southwest Iowa friend was offered an adjacent parcel. He snapped it up immediately.
• Land prices were down slightly last fall. Sales this winter will offer hints into just how stable land prices really are.

For the middle 40%

You're falling behind but your lender may have refinanced and extended short-term debt. It's going to be harder to count on that this winter. One banker in Omaha said "the refinance craze" is over. That's not universally true, but here are some things lenders are looking for.

• Bankers want accurate financial statements and your understanding of key financial ratios. "The best thing farmers can do is really understand where they are financially," says Todd Doehring of the Centrec Consulting Group in Savoy, Illinois. "Have a plan to achieve profitability. Going into a loan renewal meeting without some kind of a plan is not a good strategy," says Doehring, who is president of the Farm Financial Standards Council.
• You should also understand your farm's burn rate (the amount of time it will take to use up your farm's working capital and other liquid assets). Can you change that? How much do you want to burn?
• Don't take false comfort from lenders who still rely on "good character and collateral," even if you're falling behind. Kohl predicts those lenders will go out of business. If you're one of their borrowers, your real risk may not be apparent.

For the most stressed 20% of farmers

If you're going out of business, my heart goes out to you. Advice at this point may seem insulting, but now more than ever you need to reach out to others.

• Debt forgiveness can have tax consequences, and you may need advice from an attorney, an accountant, or both.
• Emotional stress is normal, but you may want to reach out to a minister or counselor. Do a web search for your state's Extension resources such as the Iowa Concern hotline.

You are not alone. You should not be ashamed. Economic storms can be as devastating as tornadoes. Get help.