Friday, April 27, 2018

"The Next Threat Stalking American Farmers Is the End of Cheap Money"

From Bloomberg, April 24:
  • Highest interest rates in five years signal more spending cuts
  • Fed moves are new blow to agriculture after years of crop glut
American farmers have managed to stay afloat despite years of shrinking crop values, the lowest incomes since the recession and a budding trade war with China. Now, they’re feeling a new squeeze -- borrowing money is getting more expensive as interest rates rise. For some, it may be fatal.
“Commodity prices stink, and they’re set to stink for a long time,” said Jason Barnes, 50, who has 400 head of cattle and farms 1,300 acres of corn, wheat and sunflowers about 35 miles (56 kilometers) north of Pierre, South Dakota. “We’ve been able to survive because of cheap money. You raise rates high enough, it will have a huge impact on people’s ability to continue farming."

The Federal Reserve is tightening credit as the economy shows signs of strength, ending a prolonged period of low interest rates in the wake of the financial crisis. As a result, banks pushed the fixed rate on U.S. farm loans to a five-year high of 5.6 percent in the fourth quarter, up from 5.3 percent a year earlier, Fed data show. With more increases expected through 2019, farmers may see their thin profit margins evaporate.

For Barnes, a former banker who took over his father’s farm in 2012, the increase means he is spending $3,000 more than last year on his $350,000 operating loan. That’s money he won’t spend on hiring local workers to handle maintenance or repairs on things like watering systems, fences and cattle pens, as he normally would. If rates keep rising, he could be paying an additional $5,000 in interest by 2020.

“It’s going to get difficult as the Fed keeps raising rates,” said Jerry Catlett, president and chief operating officer of Bruning State Bank in Bruning, Nebraska, about 100 miles southwest of Omaha. Catlett already is factoring in higher debt burdens this year for farmers when assessing their creditworthiness, which means some will get smaller loans or none at all, he said.

Income Slides
Net farm income will drop in 2018 for the fourth time in five years, to $59.5 billion, down from a record $123.8 billion in 2013 and the lowest since 2006, according to the U.S. Department of Agriculture. If higher debt costs force farmers to sell land or quit, that could hurt rural communities that rely on those businesses for jobs and tax revenue.

“It’s people who aren’t buying tractors or pickups, or working on their house or going to a restaurant," said Mike Yackley, who manages the BankWest Inc. branches in Selby and Onida, South Dakota, separated by 60 miles on Highway 83. The towns, in the north-central part of the state, have a combined population of 1,300....MUCH MORE
HT ZeroHedge

Over the years we've pointed out how the situation would probably play out. Here are a couple posts from June 2011:

"Farm Debt and the Farm Real Estate Bubble"
Taking on debt for productive assets is bondage.
Taking on debt for purposes that don't produce a return is slavery.
In the farm biz the K.C. Fed is already warning member banks not to loan against inflated land values.
They should also beware of loans against top-tick cash flows.

Betting the Farm: Debt Brings Risk of Losing it All
The risk for farmers is the same as that faced by the U.S. government.
It's not the debt per se, it is the cost of servicing it. Low interest rates seduce borrowers into taking on more debt than they should because the current interest cost is manageable. Should rates increase the proportion of cash flow that must go to debt service can crowd out any other use....

The numbers can get into eight figures, here's one at $7 million and it's far from the largest:
Big farm insolvency plays out in state court

And another:
Juggernaut McM Inc. farm ends in epic fail
...Agweek reported that on Feb. 10, 2017, McM Inc. filed for Chapter 7 bankruptcy: not reorganization, but total liquidation. On March 10, 2017, McM Inc. listed debts of $49.7 million against assets of just $10.2 million. One "secured" creditor is BMO Harris Bank of the Chicago, Ill. BMO is a subsidiary of the Bank of Montreal in Canada....