Many farmers recapitalize with help from feds; all eyes on interest rates
By Carol Ryan Dumas
This year is off to a good start for agriculture, with growth in many sectors and improved farm financials. But farmers and lenders will be keeping an eye on interest rates.
There have been far fewer bankruptcies in the last 12 months than in 2018 and 2019, said Jackson Takach, Farmer Mac chief economist and senior director of strategy, research and analytics. Farmer Mac is a secondary market for agricultural credit.
In 2016, 2017 and 2018, there was a lot more profit compression and a lot more stress in working capital and balance sheets, he said during the latest “Dairy Download” podcast.
“That was starting to build in farm financial stress. You can’t have five bad years of income,” he said.
Most agriculture sectors went through kind of a grind during that period, and it started to work its way through the court system in bankruptcies.
“And then 2020 hit. And I think a lot of lenders at first were fearing the worst,” he said.
A lot of lenders thought the down cycle in agriculture combined with the pandemic’s demand disruptions were going to be devastating. But government support payments started and a “pretty incredible” run in commodity prices in 2021 turned things around, he said.
The number of farm bankruptcies in the last 12 months is about half what it was in 2019, he said.
It was a “very positive story about recapitalizing U.S. agriculture, getting cash, getting working capital and getting profits in a much better spot for many producers,” he said.
Delinquencies tend to be a leading indicator of financial stress on farms, and those are at about a six-year low, he said.
Interest rates are the unknown, but any increase in rates won’t have an immediate impact on farm operating loans, he said.
“A lot of times, farmers are fixing those at the front of the year, kind of like getting their finances lined up. They’re getting their lines set up, and maybe that’s good for a year,” he said.
If the government raises interest rates this year, they’ll flow in at the renewal point. Producers should get through 2022 with very low interest rates because the Federal Reserve hasn’t raised them yet. Farm operating loans are still at 3% to 3.5%, which is a historic low, he said.
Higher rates would come in at next year’s renewal season or trickle in through the year for those on a quarterly cycle, he said.
“So it’s not like a whiz-bang overnight you’re going to see a huge increase in your interest expense. But it is going to start to eat into farm profits into 2023 and probably a little beyond as rates normalize,” he said.
The bright side is so many producers fixed interest rates for five to 30 years in fixed-rate loans for some items on their balance sheet, unlike the floating rate loans of the past. Higher interest rates will be felt in operating lines in the short term but probably not as much in other parts of the balance sheet, he said.
To view the full article, click here.