Monday, August 15, 2016

Regional Fed Banks: Agricultural Credit Conditions Crumble

First up, the Omaha World-Herald (a Berkshire Hathaway company):

More Nebraska farmers struggle to repay loans; feds suggest that low commodities prices add to struggles
More borrowers raising row crops and livestock in Nebraska and surrounding states are struggling to repay loans as prices for commodities remain stubbornly low, according to economists from the Federal Reserve Bank of Kansas City, whose territory includes Nebraska.

Bankers surveyed for the regional Fed’s latest report on agricultural credit conditions pointed to continued troubles in the second quarter. More lenders reported an increase in the volume of borrowers with repayment problems in addition to a higher number of denied loan applications relative to a year ago.

Nebraska bankers contacted by The World-Herald said they haven’t denied more loans to borrowers, but they said financial situations are certainly getting tighter.

“It’s not like there’s a wholesale disaster out there, but it is concerning this is the second year our borrowers aren’t profitable,” said Todd Adams, chief executive of Adams Bank & Trust in Ogallala. “It’s hard to find any glimmers of hope that the situation will be any better next year.”

That’s partially because a strong crop of soybeans and corn is likely to weigh down prices, just like this year’s bunker-busting winter wheat harvest did, Adams explained. A big harvest could help offset some losses, but finding profitability in a market that’s already heavy on supply will be difficult....MORE
Meanwhile ZeroHedge provides more detail as well as a quick look at the Chicago district:
Aside from a brief pause during the "great recession" of 2009, Midwest farmland prices have been bubbling up for over a decade with annual price increases of 15%-30% in many years.  Private Equity and low interest rates no doubt played a role in creating the farmland bubble as "excess cash on the sidelines" sought out investments in hard assets (see "Is TIAA-CREF Investing In Farmland A Harbinger Of The Next Asset Bubble?").  No matter the cause, data continues to indicate that the farmland bubble is bursting.

2Q 2016 agricultural updates from the Federal Reserve Banks of Chicago, Kansas City and St. Louis indicate continued income, credit and farmland price deterioration for Midwest farmers.  Lender surveys also suggest that as many as 30% of Midwest farmers are having problems paying loan balances.  Declining asset values and incomes have also caused banks to tighten lending standards which has only served to accelerate the decline.

In Kansas' 10th District (which includes MO, OK, KS, NE), values of non-irrigated and irrigated cropland declined 3% and 5%, respectively, in 2Q 2016.  In fact, 2Q 2016 marks the 6th consecutive quarter of YoY declines for irrigated cropland values.  Between 2002 to 2014, the value of both irrigated and non-irrigated cropland declined in only one other time in 3Q 2009.
Farmland prices in Chicago's 7th District (IL, IN, IA, MI, WI) paint a similar picture.  Before price declines in 2014 and 2015, farmland prices in the 7th District had only declined YoY in 4 other years since 1965.
Any supply cuts that might be expected in this type of environment aren't having an impact on commodity prices at this point with wheat and corn prices both trading at multi-year lows....MORE