American farmers who expanded production using rented land during the commodity boom a few years ago are now struggling to repay loans.
A crop glut has eroded prices and sent profit to a 14-year low, but rents have barely budged and debt levels are the highest in more than three decades, government data show. Bankers are cutting back on loans that aren't secured by land, so more farmers are tapping into a U.S. Department of Agriculture program designed to be the lender of last resort. And it’s almost out of money.
The USDA's Farm Service Agency has allocated $140 million a month on average for direct operating loans since Oct. 1, leaving just $129 million in the budget for the remaining four months of the fiscal year. With about 39% of U.S. farms operating on rented property, increased government intervention signals lower land values and more consolidation because debt-strapped and younger farmers will be forced to quit, according to farm groups advocating for more financial aid.
"Anyone carrying a lot of leverage or renting a lot of farmland, it is going to be a pretty tough year," said Jim Farrell, president of Omaha, Neb.-based Farmers National Co., which manages more than 5,000 farms and ranches in 24 states on behalf of property owners who lease their land to tenant growers and livestock producers. "I don't think bankers expect loan renewals to be a cakewalk this year."
Even though all the tenants who rent land managed by Farmers National have kept up with payments this year, there are signs that some can no longer get operating loans and that financial stress is increasing, Farrell said.
About 110 of the company's leases had to be renegotiated at lower rates this year after the contracts were signed, a move that he said was "very rare" during the three decades before 2014. Farmers National has $204 million of managed properties for sale, more than double the amount of a year ago. Farrell said he's expecting lease rates to fall before the next season as land values and incomes decline.
The USDA has forecast farmer income will drop to $54.8 billion this year, the third straight decline and less than half of the record profit earned in 2013. The ratio of debt to income has more than doubled in three years to 6.8%, the highest since 1984, when the Midwest was mired in a farm crisis that saw the highest foreclosure rates since the Great Depression.
While the finances of the agriculture industry are far better than in the 1980s — when banks made too many unsecured loans and interest rates neared 20% — the precipitous decline in crop prices over the last three years is increasing the strain on growers and lenders alike.
Corn, the biggest U.S. crop, has plunged about 50% on the Chicago Board of Trade from its peak in 2012, while soybeans and wheat tumbled by more than a third, mostly because global supplies have risen faster than demand. Cheaper animal feed also helped boost livestock production, which led to declines in meat and dairy prices. All that has put the squeeze on farmers that don't own enough land to offer as collateral for new operating loans.
Agricultural bankers surveyed during the first quarter by the Federal Reserve Bank of Kansas City said demand for loans is the highest since the quarterly survey began more than two decades ago, while repayment rates were the lowest since 2003. Loan renewals and extensions were the highest in 13 years.
"Access to annual operating credit is a make-or-break issue for many farmers, especially those just starting out," a coalition of eight farmer and rural-banker groups, including the American Banking Association and the National Farmers Union, said in a June 2 letter to Congress. "Access to credit can largely determine whether or not farmers can continue working on their lands."
The coalition urged additional funding for loans through the Farm Service Agency. In addition to administering government subsidies and offering financial advice, the agency guarantees loans for farm ownership and covers operating costs when borrowers no longer meet a bank's lending standards.
The shortfall may be temporary. Sen. Jerry Moran, the Kansas Republican who chairs the agricultural appropriations subcommittee, said in an emailed statement that lawmakers intend "to fully fund the loan programs" for farmers in the fiscal year that starts Oct. 1.
A rally in prices over the past three months also may help. While still well below their records, corn gained about 23% since the end of March and soybeans advanced 25% to a two-year high.
"The $64 billion question is whether farmers will be disciplined enough to take advantage of the rally," said Tom Jensen, senior vice president at First National Bank of Omaha, the ninth-largest U.S. agricultural lender. "2016 will separate the average farmer from the top producers."
But it may not be enough to restore farm balance sheets because prices still are below the cost of production in some areas, said Cortney Cowley, an economist with the Kansas City Fed.
"I feel a little more pessimistic when you look at how many acres of corn we’re planting and what stockpiles look like," Crowley said.