Nov 13, 2019

‘Nobody Has Working Capital’: Ag Lenders Lament Trade War’s Impact

By: Jon Prior

Loss of income resulting from the ongoing trade war between the U.S. and China is forcing more farmers to tap the resilient value of their land to keep them going through next year’s planting season.

According to a survey of lenders released at the American Bankers Association’s annual agricultural banking conference here this week, more than 46% of bankers expect an increase in loans secured by farmland over the next year, compared to 37% who saw an uptick in this kind of financing over the previous 12 months.

The findings suggest that many farmers are burning through cash they had put aside to weather unprofitable harvests from lower commodity prices. The equity stored in the value of their farmland is considered the last financial resort for some to cover operating expenses.

So far, loans secured by farmland are holding up well, but bankers are growing increasingly concerned that credit quality will weaken if the trade war drags on much longer. Roughly three out of four the ag lenders surveyed by the ABA and Famer Mac said that farmers’ ability to repay loans is their top concern.

“Nobody has any working capital right now,” said Larry Daniel, an Oklahoma-based loan manager for the Farm Service Agency, an arm of the U.S. Department of Agriculture that provides loan guarantees on farm loans. “We’re trying to keep them going another year and hope that commodity prices go up.”

The trade war has largely taken away what once was the largest buyer of farm goods from the states. The U.S. Department of Agriculture estimates that farm exports to China have dropped to $6.5 billion for the fiscal year 2019 ended in September, down from $16.3 billion the year before and from $23.8 billion in fiscal year 2017.

Stuart Hays, the director of food and agriculture banking at $5.8 billion-asset NBH Bank in Greenwood Villiage, Colo., said in an interview farmers and their lenders are growing frustrated with the Trump administration’s hardline tactics that have led too quickly to tariff hikes.

“The need for a deal is pretty severe,” Hays said.

U.S. and China officials are expected to formally agree to an initial phase of a long-term trade pact in early December, but it’s still unclear how much of the tariff hikes between the two sides will be rolled back and on which goods.

Jim Chessen, the chief economist for the American Bankers Association, said during a presentation at the conference Monday that even if a deal is reached soon, the impact of the spat will be felt for years. It’s led to a decline in business investment that could ultimately shave as much as a full percentage point off of GDP growth, he said.

“We’re going to have a significant drag in the U.S. for a long period of time because of the uncertainty that already has been created,” Chessen said. “Even if you do the trade resolutions it takes time for that to work out. It’s a concern that it’s already had consequences.”

Nathan Kauffman, an economist with the Federal Reserve Bank of Kansas City, echoed the same concerns for ag banks and their farming clients.

“It has the potential to be much more long lasting” because of how long the wait for a bounce back can usually take when two countries reopen trade deals, Kauffman said.

Despite the stresses facing agriculture, land values have actually increased slightly over the past year, in part because the industry is consolidating and buyers have been eagerly scooping up land. Just one in five lenders said in the ABA and Farmer Mac survey that delinquencies on loans secured by farmland have gone up over the past year.

“The reality is that there is pretty strong demand for farmland,” Kauffman said.

Still, the concern among lenders is that land values will fall if the ag economy doesn’t improve. The ABA and Farmer Mac survey showed that nearly 83% of ag lenders have reported a compression in farm profitability over the past year.

To ease the pressure, many farmers have relied on $28 billion in bailouts from the Trump administration over the past two years to cover losses and help pay down their debts, which is more than twice the size of the bailouts for automakers in the wake of the 2008 financial crisis.

While much of the cause for the downturn is out of farmers’ hands, bankers are putting more pressure on them to better manage their operations, indicating they are increasingly willing to send borrowers who used the trade problems as an excuse to another lender.

In one presentation at the conference put on by Doug Johnson, Moody’s Analytics director of sales management, and David Kohl, professor emeritus of agriculture and applied economics at Virginia Tech, bankers were asked what their borrowers would say is their biggest challenge over the next five years.

Nearly every attendee answered that farmers would point to commodity prices and the trade war. However, banks said that to them, the biggest challenge was getting farmers to improve their skills at marketing.

Many are considering alternative sources of income to better manage their farms. About half of lenders surveyed by ABA and Farmer Mac said they have been approached by farmers about financing hemp production, and more than one-third have been asked about financing for solar panel construction projects so they can rent their land to energy companies. Some at the conference have seen farmers turn to planting increasingly popular plant-based sources of protein, like yellow peas.

“In any given year, on any given commodity, there is always a chance to make more money,” Johnson said.

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