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Farmers facing money erosion

Crop prices, new insurance raising risk bar for lenders by Glen Chase | April 12, 2015 at 2:57 a.m. | Updated April 12, 2015 at 2:57 a.m.

Two years of lower commodity prices, combined with uncertainties about new federal crop insurance programs, are making 2015 a tough year for row crop farmers to secure operating loans.

"No doubt, we're in a little bit more of a stressful situation than we've seen in recent years in crop agriculture," said Greg Cole, president and chief executive officer of AgHeritage Farm Credit Services.

With $3 billion in assets, AgHeritage is the state's largest agricultural lender, according to Cole. He described the major commodities grown in Arkansas -- which include rice, soybeans and cotton -- as being in transition, a situation caused by high inventories, a slowing in the domestic ethanol industry, as well as flat demand in growing economies such as China and India.

"We've enjoyed several years of really strong prices and profits up to 2014. Starting in 2014, we basically entered a down cycle caused by high inventories," Cole said.

A decline in commodity prices, coupled with a "radically" restructured safety net for producers provided under the 2014 farm bill, has made assessing loan risk difficult, Cole and other lenders said. Tight cash flow has already struck some growers as the percentage of loans going into state mediation jumped 74 percent in the first three months of 2015 compared with a year ago.

While sources said nearly all loans are being approved based on the applicants' records as customers and their equity, profit margins are tight. Future lending could be affected if growers see crop yields fall because of poor weather or if commodity prices remain low.

"The costs, they go up and they never come down," said Steve White, a vice president of McGehee Bank in McGehee.

White said even though fuel prices have eased, the costs of equipment, fertilizer and seed have skyrocketed. Crop yields can be pushed only so far, he said, and to do that, growers typically need to increase their input costs. And there are limits to what plants can yield.

With lower commodity prices, land values have held steady or declined, White said. The value of equipment has fallen as growers hang on to gear such as tractors and combines rather than buying new.

To stay in business, growers are relying on capital and equity built up under better conditions in past years.

"Over the last few years, they've been able to make money, they've built equity. But when they lose money, it burns equity," White said.

"Disaster payments, insurance, a lot of that type stuff really doesn't help unless you have a huge loss," he added. "We've been able to do [loans] this year, but they're really tight on paper and it will be interesting to see how it comes out."

The Federal Reserve Bank of St. Louis, which tracks lending by commercial banks, reported that as of Dec. 31, Arkansas lenders had about $1.24 billion in agricultural loans outstanding out of an overall loan portfolio of $40.7 billion.

The reserve bank's figures don't include lending by Farm Credit Service operations.

This year's tight financial picture for farmers is spilling over to older agricultural loans, such as for longer-term notes for equipment. The state agency that mediates past-due note disputes reports that its caseload has nearly doubled in the first three months of this year compared with the same period a year ago.

Rick Johnston, coordinator of the Arkansas Farm Mediation Program that is overseen by the Arkansas Development Finance Authority, said his agency had opened 110 cases with past-due amounts owed creditors involving agricultural loans with a combined value of $27.9 million.

That compares with 61 cases worth $16.6 million in the same period of 2012; 58 cases worth $12.9 million in 2013; and 63 cases worth $15.3 million in 2014.

"We had a pretty good number, 110 cases through March 31," from initiating creditors who are offering mediation, Johnston said. "I generally would see a range of maybe a low of 15-16 cases per month being offered, maybe up to 28 at the higher level. But I would not go 28 a month for three consecutive months."

On Feb. 12, the Federal Reserve Bank of St. Louis reported that farm income, household spending and capital equipment expenditures all declined in the fourth quarter of 2014, compared with the same quarter in 2013, according to a survey of 39 agricultural banks in the district. The St. Louis reserve district includes all or parts of seven Midwest and Mid-South states, including Arkansas.

The reserve bank's Agricultural Finance Monitor said that while prices for farmland held steady, it expects its indexes for farm income, expenditures and capital spending to fall in the first quarter of 2015, compared with the previous quarter.

The report said interest rates in the fourth quarter for operating loans averaged 5.24 percent for a fixed-rate loan and 4.95 percent for a variable-rate loan. The rate for machinery averaged 5.55 percent fixed and 5.2 percent variable, while farm real estate loans averaged 5.36 percent fixed and 4.88 for variable-rate loans.

Randy Veach, president of the Arkansas Farm Bureau, said the situation has produced uncertainty for farmers, bankers, equipment dealers and agricultural suppliers.

"Farmers are holding tight and not buying anything that they don't absolutely have to have," Veach said. "The situation we're in right now, as far as the coming financing and being able to pay back those loans and all, is very, very uncertain."

With the end of direct subsidy payments from the government, Arkansas growers are forced to make safety-net decisions based on farm management and crop yields, Veach said. The old direct payment system wasn't coupled to production or commodity prices, and gave producers a minimum guaranteed income.

"There's nothing in [the new farm bill] we can take to the bank when we're going to the bank and say I'm going to get this money right here," Veach said.

Under the new farm bill, growers must rely on price reference and production points set by the U.S. Department of Agriculture to determine whether payments are warranted, figures that Veach said can be set too low for when growers need help.

"Once we get into that position, then we're going to be looking at a pretty good loss in our operations before we ever trigger any support from those programs, which is why we don't consider it much of a true safety net," Veach said.

Arkansas farmers aren't alone. The USDA is expecting farm income nationally to decline 32 percent to $73.6 billion in 2015 -- the lowest since 2009. The department expects crop receipts to drop by $15.6 billion; livestock to fall by $10.1 billion; and fruit/nuts down $3.4 billion. At the same time, it's estimating that overall production expenses will climb 1 percent.

The American Bankers Association, which also tracks farm lending by banks, said in a report that it expects the farm sector's debt-to-asset ratio to rise to 10.9 percent in 2015, and the debt-to-equity ratio to rise to 12.2 percent. But it said that while the farm sector may be under increasing pressure, the ratios are at "historically low levels," giving the sector a "relatively strong financial position" even as farm banks will "struggle to generate higher future earnings."

While row crop farmers in the eastern half of the state deal with financial uncertainties, cattle and poultry operations in the western part of the state are taking advantage of low feed and energy prices that are keeping these operations in the black, said Brandon Haberer of Russellville-based Farm Credit Services of Western Arkansas.

"We are loving seeing this cheap grain because we're so heavy into poultry and cattle," he said. "Our farmers in western Arkansas are having a real good year, and all the metrics are lined up and couldn't be any better."

Many cattle and poultry operations suffered in 2012 when a national drought drove up feed prices, resulting in decisions to sell off herds and flocks. Haberer said his agency has a loan portfolio of about $1 billion, but focuses more on land and infrastructure, rather than operating loans.

Low commodity prices pose just the opposite problem for row crop farmers.

Freddie Black, chairman of the south Arkansas region for Pine Bluff-based Simmons First National Bank, said growers have had a "tough spring" in dealing with reporting base acreage and yields to the USDA as required by the farm bill to obtain crop insurance while waiting for fields to dry out so they could begin planting.

"On all of our crop loans, the margins are really thin," said Black. He said Simmons has made nearly all of its operating loans for this year. While a handful of growers needed to restructure their loans, Simmons didn't lose any of its customers, he said. "The last two years, we've enjoyed cooler summers, occasional rain, so we've really made good crops," setting yield records for soybeans, corn, rice and cotton.

Black agreed that much will depend on weather during the 2015 growing season. A stretch of 100-degree days in July and August, or an ill-timed hurricane as fields are ready for harvest could drastically reduce yields.

"Last year hurt some," Black said. "And then this looks like it could be bad again, and then it'll make next year even worse."

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