Eroding balance sheets are a concern for many farmers and ranchers across the U.S. Three years of declining net farm income is eating away at working capital, and it’s showing up on the radar of the Federal Reserve.
The Kansas City Federal Reserve covers a wide geography: Colorado, Kansas, Nebraska, Oklahoma, Wyoming, western Missouri and northern New Mexico. The November Ag Credit Survey found working capital is being pinched, due to pressured commodity prices across the board.
In a survey of bankers, the Kansas City Fed found nearly 82 percent of bankers reported a year-over-year decline in crop producers’ working capital. Economists say while the decline was not as significant as 2016, more bankers showed concern about working capital in 2017 than they did in 2014 and 2015.
“Profit margins are still pretty weak and there are still some producers struggling in terms of maintaining a positive profit margin,” said Nathan Kauffman, assistant vice president and Omaha branch executive. “As we go into 2018, think the focus will again be on what is the cash flow picture and how are people financing their operations for the next year.”
Kauffman says the Fed found that while working capital is diminishing, the survey results showed a glimmer of hope. The Kansas City Fed found farm income continued to decline in the third quarter of the year, but at a slower rate. For the 13th consecutive quarter, 52 percent of bakers reported farm income falling from the year prior, which the Fed says is the lowest share in two years. Less than half of those bankers expected farm income to fall further in the fourth quarter of 2017.
However, the expectations on farm income for 2017 varies state by state.
“We cover a seven-state area in the center of the country that goes from Nebraska to Oklahoma and it goes from the western portion of Missouri over to the mountain states,” said Kauffman. “I mentioned that simply because we have a tremendous variety of soil type and quality. And I think that in some areas you see some potential and in other areas there's maybe not quite as much as we looked even last year at the areas of the country that saw some outstanding yields.”
The Kansas City Fed says in western Missouri where yields have been strong the past few years, and look to be strong this season, bankers expecting lower income next quarter decreased for a third straight year.
“I think some areas have seen some tremendous yields, and they could very well have some strong yields again this year that compensate for the low-price environment that they're in,” said Kauffman.
Another area where the farm financial picture is looking up is Oklahoma, mostly due to stronger livestock prices. Only 25 percent of bankers in that state expect farm income to decline the final three months of the year.