Serious problems that developed in the agricultural credit situation in 2009 could escalate in 2010–2011, says Danny Klinefelter of Texas AgriLife. "The past two years in commodity, real estate and financial markets have made it abundantly clear that changes can occur quickly. We have also learned that 'Black Swan' events are real.”
The earliest problems arose in the livestock sector, he notes. "Producers in all protein sectors have suffered significant losses for over a year, resulting in a large increase in nonperforming loans. Although there were few foreclosures in 2009, without a significant turnaround in income, many dairy and hog loans are in a near-crisis situation. Many producers have lost enough equity that lenders will be forced to discontinue financing.”
The total agricultural impact will be magnified because many dairy and hog enterprises represent the majority of their total operation's assets. If the livestock operation fails, all assets will have to be liquidated, including land, he adds.
"Some well-managed hog operations will be liquidated not just because of their own performance, but because their integrator fails and the entire supply chain goes down with them,” Klinefelter says.
"Crop producers have fared fairly well over the past several years, but many are likely to have carryover operating debt if they purchased inputs early in the year when inputs were high and then had a poor crop or forward priced their crop after prices declined,” he says.
"Fortunately, most grain producers have had a run of several years of above-normal income and pushed cash forward into 2009 for tax reasons. Now, margins appear to be returning to normal.”
Shakeout. "The reality is that there has been little involuntary exit in the past four or five years. Unfortunately, boom periods tend to be followed by a cleansing period of about three years and a hangover effect can extend beyond that,” Klinefelter says. Going forward, "business success depends on continuous improvement at a pace necessary to stay out of the back of the pack.”