It’s been a tough year. The most recent years have all been tough. Low commodity prices cause decreased land values, tighter balance sheets and a high level of stress for producers across the country. As a result, they continue to take on more debt. In fact, the absolute amount of outstanding farm debt is likely to reach an all-time high this year.
“If debt were to increase 5% from current levels it will exceed 1980 levels,” says Brent Gloy of Agricultural Economic Insights.
While that’s true in terms of raw dollar figures adjusted for inflations, unlike the historic downturn of 1980, farm debt to asset ratios are still very low.
“In terms of the amount of debt as it relates to the amount of assets, we are still in pretty good shape,” says Jackson Takach, director of economic and financial research at Farmer Mac. “The amount of leverage on the farm in the past few years has been incredibly low.”
According to Takach, when you look at historical USDA data it’s clear that despite the large amount of outstanding debt, farmers are still in a good position. Economic Research Service data shows the current on-farm debt to asset ratio at 14%. Compare that to its highest point of 22.2% in 1980 and its lowest point of 11.3% in 2012.
“We’re higher than where we were five years ago,” Takach explains. “But we’re still nowhere near where we were in the ‘80s.”
Prior to the 1980 agricultural economy crash, farm income was very volatile and producers didn’t have much opportunity to stockpile assets. Going into the current downturn, commodity markets hit record highs and producers had several good years to get their financial houses in order.
“Farmers had much healthier financials going into this downturn than they did going into the 1980s,” Takach says.
Still, because of low commodity prices, some producers haven’t been able to pay their bills.
The Kansas City Federal Reserve reports credit conditions in their district continue to weaken and some producers are having trouble repaying their debt.
“The severity of loan repayment problems increased [in Q2 2017], but not as sharply as a year ago,” explains Nathan Kauffman, assistant vice president and Omaha branch executive. “In the second quarter, 27% of bankers reported ‘minor repayment problems,’ up from 22.5%a year ago.”
According to Takach, most of the time this has to deal with cash flow problems and isn’t related to a systemic issue.
Most producers carry two kinds of debt, non-real estate debt and real estate debt. Real estate debt has declined three times in 17 years and non-real estate debt has declined 8 times, Gloy says. But, since 2009 real estate debt has increased 5% per year.
Real estate debt is particularly painful during times of low land values. Fortunately, land values seem to be improving. A recent report from the Chicago Federal Reserve Bank shows an increase in farmland values in the seventh district. Despite the low prices for corn and soybeans in 2016, farmland values saw an increase in the district.
“For the second quarter of 2017, there was a year-over-year increase of 1 percent in District agricultural land values—which was the first such upward movement since mid-2014,” said David B. Oppedahl, senior business economist with the Chicago Federal Reserve Bank in the report released by the bank in August.
Gloy says real estate debt has been greater than non-real estate debt every year and today the gap between the two is the largest it’s ever been. While this concerning, it’s not all doom and gloom in farm country. During the second quarter of 2017, the KC Fed says the lowest share of bankers reported a decrease in repayments since the middle of 2015. Farmers seem to realize they need to get their debt loads under control.
“We have been completing more FSA loans as well as secondary market conventional real estate loans for restructuring debt to enhance working capital and improve debt structure,” a banker in Western Nebraska commented during the Kansas City Federal Reserve banker survey. “Also, some borrowers have sold some assets to reduce debt servicing.”