Farmers are doing a good job paying back their farm loans, but Uncle Sam may be due most of the credit, according to one agricultural lender.
“Farm Credit's farm loans are pretty healthy right now, in both repayment capacity and in credit quality, mostly because of the government assistance that farmers are receiving,” says Richard Monson, with the Southwest Georgia Farm Credit Association in Bainbridge, Ga. “Despite the current farm economy, a combination of assistance from Uncle Sam, lower interest rates, and a decrease in term debt amounts as compared to 10 or 15 years ago, is enabling most farmers to pay their operating loans in full and on time.”
The financial outlook for agriculture, however, is still very uncertain, Monson told producers attending the 2001 Southern Region Agricultural Outlook Conference held recently in Atlanta.
“Under an uncertain outlook the one thing you can ill afford to do, or have, as a farmer is non-earning assets and the debt associated with them, on your balance sheet,” he says. “Now is not the time to buy land if you have to finance the majority of it, and it might be the time to really look at the assets under your control in your farming operation to see if they are truly productive. If they are not, now may be the time to rid yourself of those assets.”
What farmers planning for the 2002 production season do not need to do, Monson says, is try to “fix” their farm operation's balance sheet by increasing their production acreage. “Do not say, ‘my debt is too short, so what I need to do is increase my term debt.’”
Some farmers have the tendency, he says, to believe that they will increase their profits by increasing their farming acreage. “You can't grow yourself out of this near-term uncertainty. Unless you are in really good financial shape, more acres aren't going to help you and may instead hurt you financially. In fact, an increase in term debt interest could likely kill your balance sheet.”
“Term debt is one of our biggest killers,” he says. “When you buy a fixed asset like a house, farm land or equipment it is amortized over time, primarily because your long-term value on that land has to exceed its cost. Farmland, however, is taking a long time for it to pay for itself, on paper at least.”
Monson says, “The interest expense associated with term debt is probably one of the most detrimental things there is to a farming balance sheet. One of the reasons the current farm economy is more healthy as compared to the mid-80s is that there is not near the term debt now that there was then, making farmers a little more able to withstand the drop in prices.”
To better grasp the overall financial health of agriculture, Monson analyzed the loan portfolio for Farm Credit's third district, which encompasses the Mid-South, Southeast, and most of the Atlantic Seaboard. What he has discovered is that the district portfolio is relatively healthy, thanks mainly to government farm payments.
Adding financial stability are land prices, which across the district are averaging $2,000 per acre, with Mississippi land values averaging $1,000 per acre and Maryland land values coming in at $3,600 per acre.
A drop in 30-day delinquency rates is another leading indicator that's helping prop up the overall financial picture, as is a drop in the reported number of both non-earning loans and charge-offs.
A non-earning loan is basically a loan that is more than 90 days past due. After a 90-day delinquency period, a loan is classified as non-accrual, which means that interest in no longer accruing on that loan.
If a loan continues to be classified as non-earning and it becomes evident that the back will not recover all of the money it is owed, some may be written off as a “net charge-off” by the bank. “You can't get blood out of a turnip and if a grower owes his lender $500,000, but can only raise $300,000 through the sale of land and equipment, the other $200,000 is written off by the lending institution,” Monson says.
“Despite the fact that the agricultural economic outlook doesn't look very bright due to the decline in commodity prices, agricultural loans are performing better than you would expect them to in the current farm economy. Again, the reason for the low numbers of non-earning loans and net charge-offs goes back to Uncle Sam,” he says.
According to Monson, Farm Credit's district portfolio includes $10.2 billion in agricultural loans, or about 27 percent of total farm debt for the region, for commodities including cotton, corn, soybeans, peanuts, catfish, fruits, vegetables and livestock. About 70 percent of the portfolio is made up of “traditional” farmers, with the remaining 30% in specialty farm, timber and housing loans.
Demand for farm financing is also rising, he says, with Farm Credit gaining market share over commercial banks for the first time since 1993.
With credit demand steady and the overall financial health relatively good, Monson says the big question that remains is the next farm bill.
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