Tag Archives: Farming

Signs The US Gov’t Is Preparing For Farmageddon

President Trump on Tuesday morning hinted at what appears to be yet another farm bailout (the third one must be the charm), as farm bankruptcies soar and agricultural debt loads become unbearable.

A farm crisis on par to what was observed in the early 1980s could be coming, especially since the US Senate passed a bill late last week that makes it more accessible for farmers with larger debt loads to file for bankruptcy protection, reported Reuters.

The bipartisan bill, designated as the Family Farmer Relief Act of 2019, increases the total debt load of how much a farmer can have to meet the qualifications to file Chapter 12 bankruptcy, to $10 million from the prior $4 million ceiling.

According to the US Department of Agriculture (USDA) data, operating a farm today involves much higher costs than it did three decades ago. Experts say without a complete reform of the law, mom-and-pop farmers would be subjected to Chapter 11 bankruptcy protection, which is expensive and chaotic.

The bill was passed last Thursday and earlier by the US House of Representatives, is headed for President Trump’s desk to sign. Judging by the president’s comments on Tuesday morning about the potential of a third farm bailout, it seems that this bill will most likely get passed.

Republicans and the Trump administration are preparing for Farmageddon with new interventionist measures that will hopefully cushion farmers from retaliatory tariffs by China.

The new bill once signed, will support President Trump’s farm base that has been walloped by retaliatory tariffs by China on agriculture products.

The bill’s intended purpose is to help farmers avoid “mass liquidations and further consolidation in the largest sectors of the industry,” said US Senator Chuck Grassley, a Republican from Iowa where soybean, pork, corn, feeds and fodder, and processed grain products are the top exports of the state.

Bankruptcy lawyers and agriculture trade groups have been quickly pushing for the change due to farm incomes collapsing in the last several years, which have unleashed a tidal wave of bankruptcies not seen since the 1980s farm crisis.

“With farm bankruptcies at a record high in some regions of the country, Senate passage of the Family Farmer Relief Act sends an important signal to family farmers and ranchers that our elected officials are willing to act in these challenging times. The bill gives more farmers an opportunity to qualify for financial restructuring so they can keep their land and livelihoods. We are eager for the President’s signing of this bill and appreciate the leadership of Senator Chuck Grassley (R-IA) and all the cosponsors for their support of America’s farmers and ranchers,” said American Farm Bureau Federation President Zippy Duvall.

Reuters notes that not everyone is excited about the change. The American Bankers Association told lawmakers to oppose the bill and warned “credit terms would tighten considerably for many family farms, with a disproportionate impact on the most distressed farms most in need of credit,” according to a memo sent to House lawmakers on July 25.

A Reuters investigation of the Federal Deposit Insurance Corporation showed that major Wall Street banks are now winding down risky lending to farmers as farm incomes decline and delinquency rates soar.

Government is preparing for a farm crisis; this time, it could be worse than the 1980s.

Source: ZeroHedge

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Rural America Is On The Verge Of Collapse

The Economic Innovation Group’s (EIG) Distressed Communities Index (DCI) shows a significant economic transformation (from two distinct periods: 2007-2011 and 2012-2016) that occurred since the financial crisis. The shift of human capital, job creation, and business formation to metropolitan areas reveals that rural America is teetering on the edge of collapse.

Since the crisis, the number of people living in prosperous zip codes expanded by 10.2 million, to a total of 86.5 million, an increase that was much greater than any other social class. Meanwhile, the number of Americans living in distressed zip codes decreased to 3.4 million, to a total of 50 million, the smallest shift of any other social class. This indicates that the geography of economic pain is in rural America.

https://www.zerohedge.com/s3/files/inline-images/us%20population%20distribution%20across%20quintiles.png?itok=e48O-Ehk

Visualizing the collapse: Economic distress was mostly centered in the Southeast, Rust Belt, and South Central. In Alabama, Arkansas, Mississippi, and West Virginia, at least one-third of the population were located in distressed zip codes.

“While the overall population in distressed zip codes declined, the number of rural Americans in that category increased by nearly 1 million between the two periods. Rural zip codes exhibited the most volatility and were by far the most likely to be downwardly mobile on the index, with 30 percent dropping into a lower quintile of prosperity—nearly twice the proportion of urban zip codes that fell into a lower quintile. Meanwhile, suburban communities registered the greatest stability, with 61 percent remaining in the same quintile over both periods. Urban zip codes were the most robust—least likely to decline and more likely than their suburban counterparts to rise,” the report said.

https://www.zerohedge.com/s3/files/inline-images/axios%20distressed%20communities%20map.png?itok=8G5Bfugh

Prosperous zip codes were the top beneficiaries of the jobs recovery since the financial crisis. All zip codes saw job declines during the recession, each laying off several million jobs from 2007 to 2010. But by 2016, prosperous zip codes had 3.6 million jobs surplus over 2007 levels, which was more than the bottom 80% of distressed zip codes combined. It took five years for prosperous zip codes to replace all jobs lost from the financial crisis; meanwhile, distressed zip codes will never recover.

https://www.zerohedge.com/s3/files/inline-images/change%20in%20employ%20.png?itok=fQBINbLc

EIG shows that less than 25% of all counties have recovered from business closures from the recession.

“US business formation has been dismal in both magnitude and distribution since the Great Recession. The country’s population is almost evenly split between counties that have fully replaced (with 161 million residents) and those that have not (with 157.4 million). This divide is due to the fact that highly populous counties—those with more than 500,000 residents—were far more likely to add businesses above and beyond 2007 levels than their smaller peers. Nearly three in every five large counties added businesses on net over the period, compared to only one in every five small one,” the report said.

To highlight the weak recovery and geographic unevenness of new business formation, EIG shows that the entire country had 52,800 more business establishments in 2016 than it did in 2007.

https://www.zerohedge.com/s3/files/inline-images/increase%20business%20between%2012%20-16.png?itok=hCJQn6oq

Five counties (Los Angeles, CA; Brooklyn, NY; Harris, TX (Houston); Queens, NY; and Miami-Dade, FL. ) had a combined 55,500 more businesses in 2016 than before the recession. Without those five counties, the US economy would not have recovered.

https://www.zerohedge.com/s3/files/inline-images/business%20formation%20change.png?itok=lo2b1woS

On top of deep structural changes in rural America, JPMorgan told clients last week that the entire agriculture complex is on the verge of disaster, with farmers in rural America caught in the crossfire of an escalating trade war.

“Overall, this is a perfect storm for US farmers,” JPMorgan analyst Ann Duignan warned investors.

Farmers are facing tremendous headwinds, including a worsening trade war, collapsing soybean exports to China, global oversupply conditions, and crop yield losses in the Midwest due to flooding. This all comes at a time when farmers are defaulting and missing payments at alarming rates, forcing regional banks to restructure and refinance existing loans.

https://www.zerohedge.com/s3/files/inline-images/farm%20bankruptcies_1-1.png?itok=vbp0CFRo

Today’s downturn of rural America is no different than what happened in the 1920s, 1930s, and the early 1980s.

Source: ZeroHedge

 

Farm Crisis: Suicides Spike In Rural America As Trade War Deepens

https://whiskeytangotexas.files.wordpress.com/2019/05/distressed_maga_hat.jpg?w=511&zoom=2

The deepening trade war between the US and China has roiled complex global supply chains and America’s Heartland. The latest breakdown in negotiations comes at a time when soybean exports to China have crashed, and huge stockpiles are building, have resulted in many farmers teetering on the verge of bankruptcy. Mounting financial stress in the Midwest has allowed a public health crisis, where suicide rates among farmers have hit record highs, according to one trade organization’s interview with the South China Morning Post.

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“They’re Running Out Of Options” – U.S. Farm Bankruptcies Surge To 10-Year High As Trade War Bites

The Farm Belt helped cement President Trump’s historic electoral triumph over Hillary Clinton. But even before Trump started his trade war with China nearly one year ago, Trump’s protectionist bent has added to the collective woes of farmers, who were already struggling with low prices for corn, soy beans and other agricultural commodities.

China’s decision to purchase millions of soybeans (after orders ground to halt late last year following another round of tariffs) offered some relief to soybean producers who were teetering on the brink even with President Trump’s farm bailout money in hand. But even if negotiations result in a lasting agreement, it might not be enough to save hundreds of American family farms from collapsing into bankruptcy, as the Wall Street Journal pointed out in a story published Wednesday.

https://www.zerohedge.com/s3/files/inline-images/Screen%20Shot%202019-02-06%20at%204.26.01%20PM.png?itok=yL2oJsJ4According to a WSJ analysis of federal data, the number of farmers filing for bankruptcy has climbed to its highest level in a decade…

https://www.zerohedge.com/s3/files/inline-images/Screen%20Shot%202019-02-06%20at%204.25.28%20PM.png?itok=AR7pPbXg

…driven by a lasting slump in agricultural commodity prices due in large part to the rise of rival producers like Brazil and Russia.

Bankruptcies in three regions covering major farm states last year rose to the highest level in at least 10 years. The Seventh Circuit Court of Appeals, which includes Illinois, Indiana and Wisconsin, had double the bankruptcies in 2018 compared with 2008. In the Eighth Circuit, which includes states from North Dakota to Arkansas, bankruptcies swelled 96%. The 10th Circuit, which covers Kansas and other states, last year had 59% more bankruptcies than a decade earlier.

And Trump’s trade wars – not just with China, but more broadly – aren’t helping.

Trade disputes under the Trump administration with major buyers of U.S. farm goods, such as China and Mexico, have further roiled agricultural markets and pressured farmers’ incomes. Prices for soybeans and hogs plummeted after those countries retaliated against U.S. steel and aluminum tariffs by imposing duties on U.S. products like oilseeds and pork, slashing shipments to big buyers.

Low milk prices are driving dairy farmers out of business in a market that’s also struggling with retaliatory tariffs on U.S. cheese from Mexico and China. Tariffs on U.S. pork have helped contribute to a record buildup in U.S. meat supplies, leading to lower prices for beef and chicken.

Because of this, the level of farm debt is approaching levels last seen in the 1980s.

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The stress on American farmers is also affecting agribusinesses giants like Archer Daniels Midland, Bunge and Cargill, who are feeling the heat even as lower crop prices translate into less-expensive raw materials for the commodity buyers.

What’s worse is that even after working side jobs to try and make ends meet, some farmers are still winding up more than $1 million in debt.

Mr. Duensing has managed to keep farming, hiring himself out to plant crops for other farmers for extra income and borrowing from an investment group at an interest rate twice as high as offered by traditional lenders. Despite selling some land and equipment, Mr. Duensing remains more than $1 million in debt.

“I’ve been through several dips in 40 years,” said Mr. Duensing. “This one here is gonna kick my butt.”

Even more shocking than the number of bankruptcies, the number of farms that continue to operate while losing money has risen to more than half of all farms, even as the level of productivity has never been higher.

More than half of U.S. farm households lost money farming in recent years, according to the USDA, which estimated that median farm income for U.S. farm households was negative $1,548 in 2018. Farm incomes have slid despite record productivity on American farms, because oversupply drives down commodity prices.

And bankers who lend to farms warn that there will likely be more bankruptcies to come as more producers “are running out of options.”

Agricultural lenders, bankruptcy attorneys and farm advisers warn further bankruptcies are in the offing as more farmers shed assets and get deeper in debt, and banks deny the funds needed to plant a crop this spring.

“We are seeing producers who are running out of options,” said Tim Koch, senior vice president at Omaha, Neb.-based Farm Credit Services of America, which lends to farmers and ranchers in Iowa, Nebraska, South Dakota and Wyoming.

Perhaps the only silver lining – if you can even call it that – is that bankruptcy lawyers in states where farms are prevalent are doing their best business in years.

Mounting stress in the Farm Belt has meant big, if somber, business for the region’s bankruptcy attorneys. In Wichita, Kan., the firm of bankruptcy attorney David Prelle Eron filed 10 farm bankruptcies in 2018, the most it has ever handled in one year. Wade Pittman, a bankruptcy attorney based in Madison, Wis., said his firm filed about 20 farm bankruptcies last year, ahead of past years, and he said he expects the numbers to continue to rise as milk prices remain stagnant.

Joe Peiffer, a Cedar Rapids, Iowa-based attorney, said his office is the busiest—and most profitable—it has ever been. Just before Christmas, he sent letters to eight farmers declining to represent them because he didn’t have sufficient staff to handle their cases promptly. He is doubling his office space and interviewing new attorneys to join the firm.

One factor driving bankruptcies is tighter lending standards, said Mr. Peiffer, including at agricultural banks, which are under pressure from regulators to exercise greater caution over their farm-loan portfolios.

“I’m dealing with people on century farms who may be losing them,” said Mr. Peiffer, whose own father sold his farm in the late 1980s.

One anecdote featured in the story recalls the rash of suicides among NYC cab drivers, who have struggled to pay the hefty loans attached to their taxi medallions thanks to the rise of Uber, Lyft and other ride sharing apps.

Darrell Crapp, the fifth-generation owner of a hog and cattle farm in Lancaster, Wis., returned to his home one day with a queasy feeling in his stomach, only to find his wife unconscious on their bathroom floor. She had swallowed a handful of pills. She survived, but Crapp attributed the incident to financial stressors as their farm teetered on the brink of bankruptcy.

It was a Sunday in April 2017 when a queasy feeling in Darrell Crapp’s stomach sent him rushing home. He found his wife, Diana, lying crumpled on the floor of their Lancaster, Wis., bathroom. She had swallowed a handful of pills.

Overwhelmed with debt and with little prospect of turning a profit that year, the Crapps knew BMO Harris Bank NA wouldn’t lend them money to plant. The bank had frozen the farm’s checking account.

Mrs. Crapp managed the fifth-generation corn, cattle and hog farm’s books. She had stayed up nights drafting dozens of budgets to try to stave off disaster, including 30-day, 60-day and 90-day budgets.

“It was too much for her,” Mr. Crapp, 63, said of his wife, who survived the incident.

Crapp Farms filed for chapter 11 bankruptcy the next month, with a total debt of $36 million.

After filing for bankruptcy, the last of Crapp’s land, a 197-acre patch that was homesteaded by his ancestors in the 1860s, will be auctioned off in the near future.

And after all that, Crapp may still need to declare Chapter 12 bankruptcy, a personal bankruptcy provision available to farmers and fishermen, to wipe his remaining debts.

“We haven’t won very many battles,” said Mr. Crapp. “The bank pretty much owns us.”

Unfortunately for American farmers hoping to reclaim the market share they’ve lost during the trade war with China, even if Trump can strike a trade deal with the Chinese that mandates purchases of US agricultural products – which the Chinese have already pledged to do – there’s still another wrinkle: Japan recently signed a revamped version of the TPP that will offer preferential treatment to Australia, New Zealand and other rivals to American farmers, potentially sealing off another market from US agricultural products.

Source: ZeroHedge

Farm Bankruptcies Soar In American Midwest

Eighty-four farms in the US Midwest region covered by the Minneapolis Fed’s Ninth District states (Minnesota, Montana, North and South Dakota, Wisconsin and the Upper Peninsula of Michigan) filed for chapter 12 bankruptcy in the 12 months that ended in June – more than twice the level observed in June 2014, according to a new report from the Federal Reserve, surpassing the prior peak hit just after the GFC.

https://www.zerohedge.com/sites/default/files/inline-images/chart_4.png?itok=hqpoMJzA

“Current numbers are not unprecedented, even in the recent past, having reached 70 bankruptcies in 2010. However, current price levels and the trajectory of the current trends suggest that this trend has not yet seen a peak,” Ron Wirtz, an analyst at the Minneapolis Fed, wrote.

Bankruptcy numbers inversely correlate with the rise and fall of soft commodity prices. After an abrupt spike in chapter 12 filings during the GFC – which peaked in 2010 – soft commodity prices started to rise across the board and bankruptcies declined. Farm bankruptcies bottomed out in 2014, but that was at the point when prices peaked then began to drop.

https://www.zerohedge.com/sites/default/files/inline-images/chart%202.png?itok=c3ThwD_M

As shown in the chart above, some of the problems predate President Trump’s trade war with China. 

One culprit is that demand for corn and soybeans has not kept pace with increasing supply from industrialized farms over the current economic expansion. 

Some chapter 12 filings reflect low price levels for corn, soybeans, milk and even beef, but the situation had dramatically worsened since the trade war started earlier this year, and accelerated when China began slapping retaliatory tariffs on American soybeans. 

Meanwhile, as the Fed notes, not all Ninth District states are feeling the same effects. 

Wisconsin, for example, is seeing about 60% of all bankruptcies. It appears that bankruptcy filings have been unusually high among dairy farms. Mark Miedtke, the president of Citizens State Bank in Hayfield, Minn., said bankruptcy had not reared its head for borrowers in his region of southeast Minnesota, but farmers are certainly feeling the pinch. 

“Dairy farmers are having the most problems right now,” Miedtke said quoted by AP. “Grain farmers have had low prices for the past three years but high yields have helped them through. We’re just waiting for a turnaround. We’re waiting for the tariff problem to go away.”

“The underlying problem, which existed before the trade war, was overproduction. Farmers are almost too efficient for their own financial good,” Miedtke added.

The bankruptcy wave of farms is also spilling into the ag loans market as the Ninth District’s 531 banks have reported an alarming rise in nonperforming ag loans. 

“Asset quality of ag loans at these banks in the bottom quarter of the performance distribution worsened significantly after the recession. They improved markedly by 2012 and saw a couple of years of very healthy rates (Chart 3). But by 2014, asset quality in this cohort of banks was worsening again. By the second quarter of this year, asset quality would fall below levels seen in the aftermath of the recession—a trend not seen in any other standard loan category, like residential and commercial real estate, or construction and industrial, or even consumer loans,” said Minneapolis Fed. 

https://www.zerohedge.com/sites/default/files/inline-images/chart%203_0.png?itok=gKlp-uYo

The farm bust is not isolated to Ninth District states but also is showing up in other parts of the Midwest.

A new report from the Federal Reserve Bank of Kansas City, which includes Colorado, Kansas, Nebraska, Oklahoma, Wyoming, and portions of Missouri and New Mexico, shows how farms in its district reported much lower income than a year ago.

Kansas City Fed said farm incomes were expected to weaken into early 2019. The worst ag banking conditions were in states with the heaviest concentrations of corn and soybeans.

https://www.zerohedge.com/sites/default/files/inline-images/Reuters%20soybeans.png?itok=QH2QrxUe

The report also notes how farmers have started to deleverage, taking a page out of the GE playbook, with fire sales of land or equipment to make loan payments.

In short, it appears that America’s farm bust has arrived; while it has been festering for years starting under the Obama administration, with President Trump’s trade war and China shutting out US farmers to its market the perfect storm has arrived.

Source: ZeroHedge

Agricultural Debt Delinquencies Surge 225%

Commodities Bust Hits Farm Lenders

When it comes to agricultural debt, the numbers aren’t huge enough to take down the global financial system. But this shows how much pain the commodities rout is producing in the farm belt just when the farmland asset bubble that took three decades to create is deflating, and what specialized lenders and the agricultural enterprises they serve – some of them quite large – are currently struggling with in terms of delinquencies.

This is what delinquencies on loans for agricultural production – not including loans for farmland, which we’ll get to in a moment – look like:

https://i0.wp.com/wolfstreet.com/wp-content/uploads/2017/05/US-ag-loan-delinquency_2017-Q1.png

From Q4 2014 to Q1 2017, delinquencies have soared by 225% to $1.4 billion, according to the Board of Governors of the Federal Reserve, which just released its report on delinquencies and charge-offs at all banks. This is the highest amount since Q1 2011, as delinquencies were falling after the Financial Crisis. That amount was first breached in Q4 2009.

The delinquency rate rose to 1.5%, the highest since Q3 2012. On the way up, going into the Financial Crisis, delinquencies breached that rate in Q1 2009.

https://i2.wp.com/wolfstreet.com/wp-content/uploads/2017/05/US-ag-loan-delinquency-rate-2017-Q1.png

These were the loans associated with agricultural production. In terms of loans associated with farmland, delinquencies have soared by 80% from Q3 2015 to Q1 2017, reaching $2.15 billion:

https://i1.wp.com/wolfstreet.com/wp-content/uploads/2017/05/US-ag-farmland-loan-delinquency-2017-Q1.png

Farmland values have surged for three decades but are now in decline in many parts of the US. For example in the district of the Federal Reserve of Chicago (Illinois, Indiana, Iowa, Michigan, and Wisconsin), prices soared since 1986, in some years skyrocketing well into the double-digits, including 22% in 2011, and nearly tripling since 2004. It was the Great Farmland Bubble that had become favorite playground for hedge funds. But starting in 2014, prices have headed south.

This chart from the Chicago Fed’s AgLetter shows farmland prices in its district in two forms, adjusted for inflation (green line) and not adjusted for inflation (blue line):

https://i2.wp.com/wolfstreet.com/wp-content/uploads/2017/05/US-ag-farmland-prices-1974-2016Chicago-Fed-district.png

Adjusted for inflation, farmland prices in the district fell 9.5% over the past three years. The exception is Wisconsin:

    Illinois -11%

    Indiana -7%

    Michigan -12%

    Iowa (since their 2012 peak) -15%

    Wisconsin +4%

The Chicago Fed adds this about the deflating farmland asset bubble, in inflation-adjusted terms:

Even after three annual declines, the index of inflation-adjusted farmland values for the District was nearly 60% higher in 2016 than its previous peak in 1979.

Does it mean to say that there is a lot more air to deflate out of the farmland bubble and a lot more pain to come and that this is just the beginning? Or is it saying that this is no big deal?

These falling farmland prices are making the debt much more precarious. So on a nationwide basis, the delinquency rate of farmland loans, according the Fed’s Board of Governors, jumped from 1.46% in Q3 2015 to 2.0% in Q1 2017.

In terms of magnitude of the dollars involved, agricultural and farmland loans pale compared to consumer or commercial loans. So the problems in the farm belt won’t cause the next Global Financial Crisis, and it progresses on its own terms. But it is putting strain on agricultural lenders, growers, and their communities.

By Wolf Richter | Wolf Street

US Farmland Values Plunge Most In 30 Years

https://s14-eu5.ixquick.com/cgi-bin/serveimage?url=http%3A%2F%2Fcampus.udayton.edu%2Fmary%2Fgallery%2Fimages%2Fangelus.jpg&sp=aa15e86c4ad9903f14f1ae0bec7cc727Not so long ago, US farmland – whose prices were until recently rising exponentially – was considered by many to be the next asset bubble. Then, exactly one year ago, the fairy tale officially ended, and as reported in February, US farmland saw its first price drop since 1986. It was also about a year ago when looking ahead, very few bankers expected price appreciation and more than a quarter of survey respondents expect cropland values to continue declining.

They were right.

According to several regional Fed reports released last Thursday, real farmland values in parts of the Midwest fell at their fastest clip in almost 30 years during the first quarter.

This is how the Chicago Fed described the increasingly dire situation:

Agricultural land values in the Seventh Federal Reserve District fell 4 percent from a year ago in the first quarter of 2016—their largest year-over-year decline since the third quarter of 2009. Cash rental rates for District farmland experienced a significant drop of 10 percent for 2016 compared with 2015—even larger than the decrease of last year relative to 2014. Demand to purchase agricultural land was markedly lower in the three- to six-month period ending with March 2016 compared with the same period ending with March 2015. Moreover, the amount of farmland for sale, the number of farms sold, and the amount of acreage sold were all down during the winter and early spring of 2016 compared with a year ago. Nearly two-thirds of the responding bankers expected farmland values to decrease during the second quarter of 2016, with the rest expecting farmland values to remain stable.

As the WSJ added, falling crop prices have weighed on land values from Kansas to Indiana over the past two years as farm income declined and investors who had piled into the asset at the start of the decade retrenched.

Three regional Federal Reserve banks all reported year-over-year declines in farmland values in their districts and said the drops would continue, though their forecasts were based on surveys taken before the recent rally in corn and soybean prices.

The St. Louis Fed region that includes parts of the U.S. agricultural heartland in Illinois, Indiana and Missouri reported the steepest decline, with the average price of “quality” farmland falling 6.4% in the quarter, the biggest decline since its survey began in 2012. The Chicago Fed said prices for similar land in its district fell 4% from a year ago, the seventh successive quarterly decline. Adjusted for inflation, prices in an area that includes parts of Illinois, Indiana, Iowa, Michigan and Wisconsin fell 5%, the biggest quarterly drop since 1987.

Not even a recent short-term bounce in commodity prices – driven by China’s now concluded record loan expansion – is cause for optimism. Though some agricultural markets have rallied in recent weeks, prices for corn and wheat are still more than 50% lower than their 2012 peak, and the U.S. Department of Agriculture has projected that net U.S. farm income will fall this year to the lowest level in more than a decade.

Commodity prices have declined as farmers in the U.S. and elsewhere harvested bumper crops, adding to already generous stockpiles. U.S. farmers have also been hit by the strength of the dollar, which has stymied demand to export their crops.

Another reason for America’s farmland recession: the drop in land values has been accompanied by deteriorating credit conditions, with more loans taken out to cover farm operations even as repayment rates fell on existing debt.

It appears that in its scramble to save banks’ from their underwater energy exposure, the Fed forgot all about bailing out the American farmer.  The Kansas City Fed said the weaker credit environment had left many growers unable to pay off loans extended to them in the previous year, forcing them to carry debt into 2016.

It gets worse: loan-repayment rates fell for the 10th consecutive quarter, which the bank said was the longest run of deteriorating repayment rates since the early 2000s. While farm loan delinquency rates remained low, growers with significant debt may face continuing stress.

“This most recent uptick in loan demand may be more concerning because it has coincided with a period of falling repayment rates, softening farmland values and increasing collateral requirements,” said the Kansas City Fed in its report.

* * *

And then there was the latest JPM report from its 2016 Midwest planting tour. Here are some of the key findings:

We spent the last few days in the Midwest visiting dealers, farmers, and a variety of industry experts. Overall, our sense is that the industry is “healing” but the down-cycle will be long as used inventories remain elevated, used prices are still “in discovery mode”, and farmers are staring at a fourth year of losses and asset write-downs; sentiment improved a little with the USDA’s demand outlook, at least for beans (but that may be short lived). We maintain our negative outlook for US Ag fundamentals.

https://martinhladyniuk.files.wordpress.com/2016/05/30b06-serveimage.jpgAmong JPM’s other troubling findings is that farmers are not making money at current prices, and rents have started to move down, but not quickly enough; in IA, farmers must alert landlords in writing by September 1 if they want to renegotiate for the following year. Farmers have been buying equipment at auction when they perceive that it is good value, even though they may not need extra equipment; however, dealer used equipment prices continue to decline YoY, and the decline is accelerating as more used equipment is going to auction (at about a 20-30% discount).

JPM also makes the following key observations:

  • Deere dealer: The Deere dealer we met in Iowa noted that he (uniquely) sold no new equipment for the past 16-18 months in order to reduce used inventory, which peaked at $20MM and is now at $7.5MM (vs. normal of $10MM). At the peak of the cycle he sold 80 tractors and 30-40 combines and his turns were 3.5- 4.0x, whereas now his combine turns are ~1.5x. He was able to sell some used equipment to Mexico but had to liquidate some through auction at a significant loss (up to $100K on a high HP tractor)
  • Titan dealer: At the peak of the cycle this dealer sold 23 combines per year; he sold three in 2015 and has 13 sitting in used inventory (about  three years excess used inventory). He cannot sell new equipment until he sorts out the used equipment inventory (combines in particular), though he noted that he has sold six tractors YTD, more than he managed for all of 2015. Like other dealers we spoke with, Titan dealers are very hesitant to sell used equipment through auction as prices can be up to 25% lower than book value; he would prefer to sell used equipment at a loss rather than write down the value of his entire book.
  • CAT (AGCO) dealer: This dealer noted that his dealership reported $186MM in sales at the peak in 2013, and this year his budget is to deliver $130MM, but he acknowledged that he may not make the budget as he too is struggling with excess used inventory. Unlike the DE dealer who simply stopped selling new equipment, this dealer has charged his sales force with a ratio of used for every new sale (tractors and competitor combines are 2:1 used vs. new, and for Lexion combines (Claas) the ratio is 3:1). He acknowledged that he may be taking a “death by a 1,000 knives” approach that could result in 2017 sales being down again.

Here is JPM’s summary assessment on US farmer sentiment. It’s not good. 

The farmers we hosted remain pretty downbeat about the prospect for profits in the 2016/17 crop year, though they did sell most of the 2015/16 crop during the recent rally. Once again this year much of the focus was on rent, which remains elevated, and, while it may be inching lower, farmers in IA need to put in a written request for a re-negotiation by September 1 for 2017/18; those conversations are going to need to be uncomfortable this year. One farmer noted that he has 20+ landlords, so the process can be time consuming and emotionally exhausting. On a separate issue, the farmers noted that Farm Credit requested that farmers write down equipment values by 20% in January; the longer the down-cycle lasts the more stress on their balance sheets, especially for farmers renting a significant portion of their farmland. None of the farmers are rolling equipment right now, but they do not like to have  equipment out of warranty as repair costs can run to $20K out of pocket. Beyond equipment, savings are being made on seeds (by moving to fewer traits or non-GMO), but not enough to break even at current prices.

  1. farmers are still forecasting a loss (for the fourth consecutive year) in 2016/17;
  2. balance sheets are coming under more pressure as equipment values are marked down (particularly farmers with a high proportion of rented land);
  3. renegotiating rents is extraordinarily stressful and time-consuming as most farmers have multiple landlords;
  4. lenders are becoming more risk averse as the cycle extends.

Finally, for the best indication of just how dire the future is, we look at what those who know the business best are doing in terms of investments.Here is JPM: “Based on data from the Bureau of Labor Statistics, investment in agricultural machinery peaked at $50 billion SAAR in Q4’13 and is now down 58% from peak at $21 billion, about in line with 2002 levels.

While America was so focused on whether or not there is a recession in the US manufacturing and oil & gas sector, it completely ignored the depression in America’s farming heartland.

Source: ZeroHedge