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Farms on the Margins          03/19 06:55

   Debt Figures Raise Questions of Whether Farm Debt is on Cruise Control

   A traditional look at farm loans, delinquencies and bankruptcies suggests no 
real crisis in rural America, but people who work with stressed farmers say 
their workloads are getting a lot heavier because more farmers need help making 
ends meet.

By Chris Clayton
DTN Ag Policy Editor

   OMAHA (DTN) -- Iowa attorney Joe Peiffer spent the latter half of February 
helping some of his clients try to restructure debt and get operating loans for 
2019 after these farmers found out their past lenders weren't going to continue 
financing them.

   "Right now, we're having many people find out shortly before they have to 
pay rent that they aren't going to have financing," said Peiffer, who works 
with farmers in Iowa and Illinois. 

   Some of these farmers needed millions to pay rent. Peiffer said they didn't 
all get financing. Farmers who gave up rented ground run the risk of being sued 
for any shortfall landlords experience if they must lower rent to secure a new 

   At the well-known farmer support organization, Farm Aid, officials say they 
have added staffers for the group's hotline, which has seen a doubling in 
crisis call volumes.

   Peiffer and others see more distressed farmers looking for help even as 
broader debt indicators show a farm economy, while certainly down from levels 
five to 10 years ago, not in crisis. Overall, farm loan delinquency rates at 
banks remain around 2%, according to Federal Reserve and FDIC numbers. Reports 
filed at the end of last year by Farm Credit lenders show the number of loans 
in bankruptcy or foreclosure amount to 1.35% of total loans made by Farm Credit 
associations. With $194.5 billion loaned out at the end of last year, the 
dollar figure of non-accrual loans was $1.3 billion, or just 0.66% of total 
loan dollars.

   Farm Service Agency, which used to be considered the lender of last resort, 
has seen its rate of delinquent borrowers rise from 16.97% in 2013 (the height 
of farm income) to 19.41% now. The agency's 2018 direct loan volume is up $3.24 
billion, to $11.25 billion since 2013. Delinquent loan debt has gone up $147.9 
million during that same period. The percentage of loan dollars delinquent is 
5.75%, which is lower than in 2013.


   Some of the increased financial work is with farmers trying to head off a 
crisis. Peiffer is spending more time with farmers trying to get their 
liabilities below the Chapter 12 bankruptcy limit of $4,153,150. Peiffer and 
others, including Sens. Charles Grassley, R-Iowa, and Amy Klobuchar, D-Minn., 
believe the debt limit for Chapter 12 needs to be raised. "There are a lot of 
farmers, even when not talking about lease debt, who are over the top," Peiffer 

   "While Chapter 12 is a wonderful chapter for bankruptcy, many people who 
aren't necessarily farming that many acres can't qualify for it because their 
debts are too high.

   "Right now, I'm in a spot where I'm hiring additional attorneys to help more 
farmers. I'm turning business away and I can't do it all," Peiffer said.

   Financial stress is likely to get worse for many farmers caught up in the 
stress of flooding.

   "USDA and ag economists point to numbers that are much rosier than reflect 
the reality we hear from farmers," said Jennifer Fahy, communication 
coordinator for Farm Aid. 

   Farm Aid has had a hotline since the organization was created in 1985. 
Throughout most of the group's existence, though, the hotline normally operated 
with one staffer. For much of its existence, the hotline operated more as a 
"how-to" resource, answering questions about converting to organic production, 
marketing directly to consumers and through farmers markets, or helping people 
wanting to become farmers. Over the past couple years, the hotline has added 
two staff members to deal more with crisis calls, Fahy told DTN.

   "Now we are going back to those times of the '80s," Fahy said. "We have seen 
more than a 100% increase in the hotline volume."

   Forrest Buhler, an attorney at Kansas Agricultural Mediation Services run 
through Kansas State Extension, said the caseload at that office has doubled 
since 2015. The number of referrals the group makes to individual farm analysts 
has doubled as well. 

   "We've had a big increase in the number of cases over the last few years and 
are seeing some very difficult situations because of the economy and the way 
things are," Buhler said. "That has become kind of chronic since about 2015 
when net farm income kind of dropped precipitously at that point and hasn't 
really come back to its full robust self like it had been in 2014. It's been a 
steady flow and seemingly more difficult cases in that respect."

   Farm Aid often refers farmers to Extension staff in their respective states 
or to private organizations who will send people to run financial programs with 
farmers and talk about options. Over time, though, resources have been chipped 
away. There are more than three dozen states in which Farm Aid doesn't have a 
direct contact or resource for farmers to turn to in their states.

   Among the reasons Fahy said farmer are being turned away from loans is 
bankers telling farmers they need an off-farm job that offers health insurance 
to be financed. 

   The lack of good banking options has forced farmers to turn to credit-card 
debt as well. More farmers are charging their farm expenses to a credit card. 
Buhler recalls a farmer who had more than $120,000 in operating expenses 
charged on credit cards. "So if the lenders won't loan them money, they are 
having to go to other sources to try to finance their operations," he said. "So 
that's another red flag we have seen quite a bit of." 

   With lower commodity prices continuing and carryover debt piling up, it's 
becoming harder for farmers to find a production option for 2019 that will cash 
flow, Buhler said. "We're seeing a pretty serious situation, at least here in 
Kansas. We're obviously in a position where we're starting to see more 
liquidations. Creditors are saying, 'Debt has to come down, so we're going to 
have to have you liquidate some land or liquidate some machinery.' Things like 
this are happening just to get down to a basic level where they can see a way 
to cash flow the operation," Buhler said.

   "We are hearing from farmers who have been denied operating loans and they 
may not have that foreclosure notice yet, or they may not be behind in those 
debts yet, but without those operating loans, it won't be long," Fahy said. 
"Dairy is certainly one of those areas where we have already seen foreclosures 
and people getting out of the business." 


   Jim Goodman, of Wonewoc, Wisconsin, was one of nearly 700 dairy farmers in 
that state who shut down last year as he closed his 45-head organic dairy last 
fall. Wisconsin has lost roughly 40% of its dairy farms over the past decade. 
He explained the problem currently for dairy farmers: "Just too much milk."

   Goodman added, "I just got a USDA dairy newsletter yesterday about milk 
production for the last month, and outside of a couple of states, milk 
production is up a 1.5% increase nationwide."

   On the state level, officials point to hope in the farm bill's new Dairy 
Margin Coverage (DMC) program. USDA earlier this month detailed payment options 
for January market conditions that would kick in for dairy farmers based on the 
coverage they enroll in, but program enrollment might not happen until June.  
USDA has said it's made dairy enrollment rules top priority to iron out as the 
agency readies for handling new farm bill programs.

   As others are reporting about farms in general, Goodman is hearing lenders 
will increasingly move to foreclose this spring rather than loaning yet 
additional operating funds for debt-heavy farmers to put out the 2019 crop.

   Many dairy farmers are deciding on their own to close while they still have 
some equity in the operation, Goodman said. "Over the last few years, I have 
had a few neighbors that have made that decision," he said. "Two years ago, 
cows were worth a little bit more money and the forecast was that milk prices 
were going to go back down, and they said, 'Let's get out while we still have 
something left in it.'"

   On the national level, leaders insist there's light at the end of the tunnel 
for dairy farmers with a possible trade deal with China and ratification of the 
U.S.-Mexico-Canada Agreement. For others, the buzzword in dairy is supply 
management, which has gained a lot of popularity in Wisconsin with the Farmers 


   "Almost all of the popular farm press has articles about supply management 
where a few years ago almost none of them would," Goodman said. "It may not be 
something that has a lot of support politically, but it certainly seems that 
the farmers are looking at Canada where not many farms go out of business and 
you are kind of assured getting a fairly decent price for your milk.

   "Every time farmers see something like that going on, they ask, 'Why?'"

   Agriculture Secretary Sonny Perdue was pressed earlier this month by farmers 
in Vermont about supply management. Philosophically, Perdue just couldn't go 
for it, according to Vermont Public Radio. 

   "The dairy industry is wide and broad in the U.S., [and] I don't really see 
a lot of hopes for a Canadian-type supply management system," Perdue said. 
"Look, when you're under economic stress and you're rushed, you look for any 
kind of help where you can find it. I certainly understand, I'm not offended by 
the question. I just don't think the spirit of entrepreneurship and economic 
liberty in the United States really calls for a supply management system in any 
of our crop areas."


   Agricultural economy experts often point to the strength of farmland 
throughout this downturn as a saving grace, but land values show signs of 
softening in key farm states. Nebraska agricultural land values, before last 
week's flood, had declined by 3% since a year ago, according to preliminary 
results from the University of Nebraska-Lincoln Farm Real Estate Market Survey. 
The statewide average of land values is $2,650 per acre. Values have dropped 
nearly 20% since peaking at $3,315 in 2014. Rental rates were also down, 
including a 10% drop in center-pivot-irrigated cropland in northern Nebraska. 

   Iowa farmland values also fell 2.7% overall over the past year, according to 
a new report from the Iowa Chapter of the Realtors Land Institute. The average 
farmland value statewide was $6,794 an acre. Iowa land values have fallen 
roughly 17% since 2013, the Des Moines Register reported.

   Tom Jensen, senior vice president of lending, First National Bank of Omaha, 
said the number of problem loans are ticking up, but lot of good decisions in 
recent years to helping more farmers hold their heads above water.

   "While land values are off their peaks, they haven't taken large drops, at 
least in our area. But the big help is that interest rates continue to be 
reasonable. Farmers are having losses, but the effects of that don't compare 
when loans are at 5% to 6% versus (in the 1980s) when they were in the teens 
and up to 20%."

   He said bankers also capped loans on land back when farmland was being 
bought at a fast rate. "There was a lot of ground in Nebraska selling for 
$10,000 an acre, for example, and we were capping loans on that at $5,000." 
That forced growers to start ownership of that land with a higher equity 
situation than in previous land-buying sprees.

   Another challenge to the U.S. farm economy is just how much global 
competitors have hit their strides in recent years. Global wheat stocks were a 
record last year, and rice ending stocks are projected at a record this year. 
Global soybean beginning stocks, production and ending stocks all continue to 
rise, while corn production globally is expected to increase from 2017-18 and 
ending stocks are projected to be down 12% from the 2016-17 ending stocks as 
demand rises. 

   "We are looking at tremendously rising supplies," said Chad Hart, an 
associate professor of economics and crop markets specialist at Iowa State 
University. "Agriculture globally has just been on an incredible productivity 
run over the past several years. That has helped pull things along, but it also 
means prices can't improve that much because there is just so much supply 
hanging in the market."

   Hart said one reason delinquencies aren't higher is banks have done their 
work and made sure not to loan out to operations seen as substantial risks. 
"Instead of letting that farmer go delinquent, they are cutting that farmer off 
before they offer that next loan," Hart said. That leads to farmers having to 
either liquidate assets or give up portions of rented land, as Peiffer has seen 
in Iowa.

   Lower farm incomes have eroded the overall balance sheets, but they have 
disappeared from the rolls that normally gauge whether farmers are in trouble. 
Farmers struggling financially aren't showing up in the delinquencies or 
bankruptcies yet, but they are looking at alternative lines of credit as a way 
to get by.

   "They are looking for ways to get by, even if that means going outside the 
traditional boundaries of what we would consider ag finance," Hart said.

   Iowa is seeing an increase in calls to its hotline, but crop farmers have 
been able to push through the low prices with higher production.

   "For the most part, over the past few years, we have seen yields high enough 
that farmers have busheled their way through some of these financial issues 
over the past few years," Hart said. "While things haven't been great, they 
also haven't been extremely bad, either. Farmers who were just getting by in 
2016 have continued to get by 2017 and 2018."

   Data on loans and other financial indicators are a "muddy mess," and hiding 
some significant problems in agriculture, Hart said. "When we look at the 
industry averages, we look fine," Hart said. "It's hard to argue looking at the 
loan-repayment rates -- we're in good shape -- debt-to-asset ratios across the 
industry are looking good, but when you burrow down into a region of the 
country, or a specific commodity itself, then you see there is a larger group 
of folks out there."

   Some of those problems have been covered up by large production numbers, as 
well as the Market Facilitation Program payments. As of this week, USDA had 
paid just over $8 billion to farmers since the program begin last fall.

   While beef and pork producers have not been at the center of financial 
issues, there too, the immediate future holds peril. Jensen, at First National 
of Omaha, has a high number of cattle operations, particularly feed yards, in 
his lending territory. While profits have been relatively strong due to lower 
feeding costs, Jensen sees the potential for troubles, primarily related to the 
rough 2019 winter.

   "These feed yards are in rough shape with all the rain and snow. That pushes 
the cost of gains up," as animals consume more calories to stay warm versus 
putting on pounds. Conception rates are predicted to be lower for cow/calf 
operations thanks to the long, cold, wet winter, decreasing sales and 
increasing carrying expenses for the cow herd.

   "Still, we have very few delinquent loans" among the bank's cattle sector 
borrowers, Jensen said.

   Jensen agrees that relatively strong land prices have helped prop up the 
farm economy. He also credits farmers being more proactive in their financial 
and marketing dealings, rather than staying silent until they're past the point 
of no return. "We've been hiring more CPAs and attorneys with expertise in 
financial and succession planning. We're spending a lot more time advising 
families on those business and family plans, rather than simply being a 
lender." The same efforts that help pass on successful operations can give 
early warnings of troubles ahead.

   Shan Hanes, president and CEO of Heartland Tri-State Bank in Elkhart, 
Kansas, said Kansas shows a strong moisture profile going into the spring. He's 
been working with customers in his area who were struggling, such as those who 
lost a crop last summer and began working with the bank early to restructure 
loans. Hanes said he doesn't think his bank has any customers in a crisis. "But 
what we are seeing is a loss of working capital position," he said.

   Loss of working capital was a common concern at a meeting of agricultural 
and rural bankers last week, Hanes said.

   "They are making their term payments -- their real-estate or machinery 
equipment payments -- but it is coming at lower liquidity and creating a 
cash-flow crunch," Hanes said. 


   A common move is to restructure operating loans into longer-term debt. 
"Sometimes restructuring is OK," Hanes said. Restructuring can put cash back 
into an operation, but Hanes said regulators are scrutinizing refinancing. 
Without pointing to a specific regulator, Hanes said the pressure is on banks 
to minimize restructuring farmers who struggled to cover their operating loans, 
or are losing equity in the operation. Regulators need to realize the tactic 
doesn't necessarily hurt the farm operation because interest on an operating 
loan is probably a higher rate than banks can offer real-estate. "By 
restructuring, we're helping the producer on interest-rate expense and 

   In his history, Hanes said when farmers get short on cash, they start making 
short-term decisions and may reduce expenses such as fertilizer applications or 
chemical application that could increase revenue with higher production.

   "We're doing more restructurings more for liquidity than a stressed 
borrower-panic situation," Hanes said. "I just want that message to get out to 
the world, and specifically to regulators, that this is a plan and it's not a 
last-ditch effort." 

   Hanes indicated bank regulators are looking at farm loans, declaring them 
bad, and requiring foreclosure rather than giving the farmers and banker more 
flexibility. The ruling is "'Hey, you've got a bad loan here and you should 
have foreclosed.' The guy has got equity; the guy has performed. The guy has 
got positive net worth. The guy is still at a long-term farm operator in the 
right direction. We just happened to land on a year the cash was not as good. 
Restructuring makes sense," Hanes argues.

   For other farmers, restructuring is no longer an option, according to Buhler 
at Kansas Ag Mediation Services. He is increasingly seeing farmers who have 
restructured carryover debt or delinquent debt against assets, such as farmland.

   "Now, this year they are delinquent again and they don't have any equity 
left to restructure against and an inability to make payments on their debt," 
Buhler said.

   Once debt begins to exceed the value of assets, the decision is usually 
swift. "That makes it almost impossible sometimes to go to a lender and find a 
way to restructure if you have a negative net worth like that," Buhler said. 

   Such scenarios point out to Buhler that more farmers are facing greater 
financial jeopardy, and that carries over into more farm families dealing with 
stress. "Farmers just don't know what to do and they are trying to determine 
priorities and which bills to pay, and how do they keep lights on and food on 
the table, even," he said. 


   When lenders say no, farmers often call Farm Aid offices for legal services, 
financial counseling or emotional support. Usually, those three issues are 
heavily intertwined. "Typically if a farmer is calling related to an emotional 
crisis, it's related to financial or legal concerns," Fahy said. "What we've 
seen in the doubling of calls is also an increase in the severity of calls that 
are coming in such that we are seeing calls from farmers who are in dire 
straits -- some of them considering suicide." 

   Farm Aid staff have taken more training on how to spot the signs of people 
at risk of harming themselves and how to approach them. "So, from our 
standpoint, we are at a crisis and we don't have the resources to properly 
address it."

   For farmers facing no available cash, Farm Aid has some emergency grants to 
needs such as buying food, paying for emergency medical expenses, or keeping 
the power on. Most of the calls come from established farms, but they involve 
all kinds of commodities -- crops, vegetables and livestock. "It's really hard, 
and the calls are coming from farmers of all kinds," Fahy said.

   Buhler said he has been doing this work for 30 years, but said it is tough 
to insulate himself when a farmer is crying on the other end of the line, "or a 
farm family is worried about feeding their kids. It is that type of thing where 
the stress is real and people are affected, and that's what sometimes is 
glossed over by the big picture people are trying to take of this thing," he 
said. "It may be a cycle, but nonetheless, people are trying to make a living 
out here." 

   Buhler added he has referred a few families this year to the national Farm 
Aid organization, which offers financial help and other assistance. Buhler 
noted that's something he hasn't had to do in several years. 

   "So there are some real difficult situations out there," Buhler said.

   Jensen said while the number of problem loans are ticking up, he credits a 
lot of good decisions in recent years to helping more farmers hold their heads 
above water.

   "While land values are off their peaks, they haven't taken large drops, at 
least in our area. But the big help is that interest rates continue to be 
reasonable. Farmers are having losses, but the effects of that don't compare 
when loans are at 5% to 6% versus (in the 1980s) when they were in the teens 
and up to 20%."

   He said bankers also capped loans on land back when farmland was being 
bought at a fast rate. "There was a lot of ground in Nebraska selling for 
$10,000 an acre, for example, and we were capping loans on that at $5,000." 
That forced growers to start ownership of that land with a higher equity 
situation than in previous land-buying sprees. 

   DTN Editor-in-Chief Greg Horstmeier contributed to this report.

   Chris Clayton can be reached at 

   Follow him on Twitter @ChrisClaytonDTN


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