How tough will credit conditions be this fall?

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Farm Forum

Farm credit conditions are already deteriorating and USDA’s most recent crop report only provided more gray clouds to an already gloomy outlook.

Consider this new report (http://bit.ly/1QkuzMG) from the Federal Reserve Bank of Kansas City, which paints a dim picture of agriculture credit conditions in the nation’s heartland.

The survey of ag lenders throughout the seven-state 10th District covered by the bank shows credit conditions continued to deteriorate in the second quarter of 2016 as farm income “remained subdued.” The district includes western Missouri, Nebraska, Kansas, Oklahoma, Wyoming, Colorado and northern New Mexico.

Economic conditions may not harken back to the 1980’s because most farmers and ranchers have substantially better equity positions. But here are the cautionary notes coming in from some of the bankers in the 10th District:

• “Current low commodity prices will continue to drag on income. Operators are looking at all avenues to reduce their production and family living expenses.” – Southeastern Colorado

• “Many of our farmers work outside jobs. So, to date, we have found solutions for all borrowers.” – Western Missouri

• “Lower commodity prices are a big worry for grain and cattle. There is concern over what debt might exist after crops and cattle are sold.” – Southwestern Kansas

• “Cash rents fell a little in the area but not as much as expected. Less good-quality farm ground is selling but is still bringing a good price. Marginal ground has declined.” – Southeastern Nebraska

• “Farm financial conditions continue to deteriorate.” – Northeastern Kansas

• “Lower commodity prices are affecting the spending and payback of local farmers. Many are paying their interest and extending their notes in hope that prices will rise this fall at harvest time.” – Southwestern Missouri

• “All cash rents have weakened, and if commodity prices don’t stabilize or improve, I would anticipate rents to continue to weaken.” – Western Oklahoma

• “We have seen a lot less machinery and equipment spending in the past year due to farmers having less cash from crops. We also expect to see less spending by ranchers with the reduction of cattle prices.” – Northeastern Colorado

• “Bumper wheat crop will help, but increased local basis will really hurt local producers.” – Southwestern Kansas

Nearly 75 percent of bankers responding to the survey reported farm income was down from a year ago. Bankers also indicated they expect farm income to remain weak in the third quarter.

“Persistent declines in farm income in the district have continued to affect agricultural credit conditions,” according to the report’s authors, Nathan Kauffman, the bank’s assistant vice president and Omaha Branch executive, and Matt Clark, assistant economist. “Slimmer profit margins also have pulled down the rate of loan repayments. Almost half of all respondents reported that loan repayments rates in the second quarter were lower than a year ago. In addition, the severity of repayment rate problems has increased slightly over the past year.”

Lower prices ahead

Shortly after that report was released, USDA predicted bin-busting corn and soybean harvests this year, with record yields — and lower prices — projected for the nation’s two most valuable crops.

In the latest World Agricultural Supply and Demand Estimates (WASDE) report (http://bit.ly/J2ds1P), the department sees a corn crop of 15.153 billion bushels, up from 14.54 billion bushels predicted in July and 11 percent higher than last year’s harvest.

The season’s first survey-based yield projection is for 175.1 bushels per acre, up 7.1 bushels from July’s trend-based forecast. If realized, both production and yield would be the highest ever.

Nearly all the Corn Belt states, with the exception of Minnesota and South Dakota, are forecast to have higher yields than a year ago, USDA said. Late season weather conditions could, of course, change that.

For soybeans, a harvest of 4.06 billion bushels was predicted, based on a projected yield of 48.9 bushels per acre. That’s 2.2 bushels above last month’s forecast and more than last year’s record of 48 bushels per acre.

The WASDE “was quite the surprise,” John Newton, an economist with the American Farm Bureau Federation, said just after the report was released at noon today in Washington. “Most analysts were expecting an increase in the corn yield, but it was more like 2 bushels per acre. This increase was a shock.”

While cotton growers are already suffering, record or near-record crops could further depress corn and soybean prices, which have contributed to a dramatic drop in farm income. USDA is projecting an average farm gate price for a bushel of corn of $3.15, down from $3.60 for the current marketing year, which ends Aug. 31, and down from $3.70 in the previous year. For soybeans, the average cash price for the marketing year was set at $9.10 a bushel, down from $9.50 a bushel estimated in July.

Newton cautioned, however, that the harvest is just getting under way. “It will be interesting to see how USDA’s corn projection holds up.” He also said lower prices should spur export demand.

Chip Bowling, president of the National Corn Growers Association, said the report should be a “wake-up call” for Donald Trump and Hillary Clinton regarding the economic challenges facing farmers and rural America.

“Within recent days, we’ve heard a lot from both presidential campaigns regarding issues that are important to rural America,” Bowling said in statement (http://bit.ly/2aXDqrk). “We’ve heard opposition to the Trans-Pacific Partnership and attacks on our trade agreements – at the very time that agriculture needs to open new markets. We’ve heard support for expanding the use of renewable fuels – while American farmers are still battling decisions made by the US EPA that undermine biofuels use.

“Rural America needs help. With prices for a number of crop and livestock commodities already below the cost of production, the potential losses in rural America will result in fewer family farms, fewer jobs, and economic hardship. We need real solutions that help us access markets, expand biofuel use, and ensure a more sustainable future.”

Agri-Pulse Managing Editor Daniel Enoch contributed to this column.