Farmers face cliff as working capital disappears

By John Hintze

Inflation had ramped up costs across the board for farmers by the start of 2023, whether for equipment, seeds, fertilizer, crop insurance premiums or other key inputs. But in November 2023 when an economist asked Caleb Hopkins, loan production officer at First Dakota National Bank, about the burn rate of farmers’ working capital, he responded that his customers had accumulated sufficient working capital to weather the storm for a couple of years, even with commodity prices already starting to dip somewhat.

“When the same economist asked that question in January of this year about farmers’ capital, my response was, ‘It’s gone,’” Hopkins said.

He added that soon after producers renewed their 2023 operation loans, corn dropped from $6-to-$7 per bushel down to $4-or-$5 by year-end, and if farmers had not already sold their crops, their working capital disappeared and they were struggling just to stay afloat.

“It depleted those working capital levels, which is a farm producer’s first line of defense in adverse times,” Hopkins said.

Bankers see warning signs

Those adverse times are here for many if not most farmers. Bankers typically are first to see the economic challenges that farmers are likely to face, because they underwrite the annual operating loans farmers use to purchase their supplies. During renewals early this year, it became clear that farmers had not made as much money the year before as anticipated, due largely to rising costs, so bankers saw a profit margin squeeze already starting to happen. Then global prices for corn, soy, wheat and other commodities were projected to plummet.

“Bankers were seeing that early in the year, so we brought up the issue with Congress,” says Ed Elfmann, SVP for agricultural and rural banking policy at the American Bankers Association.

That push by the ABA and various farmers associations resulted in Congressional hearings and energized efforts to pass the Federal Agriculture Risk Management Enhancement and Resilience Act of 2024, commonly called the Farm Bill. Last passed in 2018, the fiveyear-duration law provides a significant safety net for farmers during difficult times and sets national agriculture, nutrition, conservation and forestry policy. The most recent iteration of the law was extended in 2023 for one year and faces an uncertain future this fall.

Without significant changes that update the law to align it more closely to today’s economic environment and significantly higher prices, “Bankers believe they may be ‘looking over a cliff, in regard to the agricultural economy,” said Tony Hotchkiss, chair of the ABA’s Agricultural and Rural Bankers Committee, in testimony on July 23 before the House Committee on Agriculture.

Margin squeeze

According to the Federal Reserve Bank of St. Louis, the prices of corn and wheat have fallen by nearly by half since summer 2022, when they were at a multiyear high. The cost of fertilizer also fell significantly over that period, and inflation overall has plummeted, but costs remain high and the U.S. Department of Agriculture estimates farmers will face a 25.1 percent reduction in net farm income in 2024 compared to 2023.

That’s another significant annual drop, after a 16 percent decline the USDA estimated for 2023 compared to 2022. These decreases are cash income values, but accrual numbers considering the current drop in commodity prices suggest it could be a much steeper decline in income for some farmers. Robert Craven, an extension economist and associate director of the Center for Farm Financial Management at the University of Minnesota, says that the Farm Financial Management Database, or Finbin, he oversees, which collects data from 3,500 farms in mostly Minnesota, found crop producers faced a 75 percent decline in net farm income in 2023 compared to the year before.

“Producers felt pretty good about their cash in 2023, but when you did an accrual adjustment, it was really a lot tougher than it felt,” says Craven.

The pain is not being felt evenly across the country or all farm products. Livestock, for example, is faring better because of lower feed costs, according to Craven, who also manages his own farm in Southern Minnesota.

“I’ve had the worst crop on my farm ever,” Craven says, adding that the prices his crops are likely to fetch are unlikely to make up the difference given the steep drop in commodity prices.

Craven says Finbin has not yet produced an estimate for 2024 net farm income, but producers overall will face at least a slight decrease in net income this year, and outcomes will vary across producer type and region. In Minnesota, he says, farmers face potential losses in corn of over $200 per acre and $160 per acre for soybeans.

“The good news is that a lot of these producers have a pretty good parachute in terms of working capital,” Craven says, noting the difficult farming environment between 2013 and 2019 that most farmers successfully weathered using the liquidity in their operation.

Nevertheless, the 20 percent of farmers with the greatest cashflow issues and the highest leverage are a concern, and the next 20 percent could also face issues, Craven says.

“If these conditions last into 2025 and 2026, we could face more challenges,” he says.

As farmers’ working capital dwindles, it becomes harder for banks to renew annual operating loans and farms may have to resort to applying for longer term debt that requires putting up their property as collateral.

Loan renewal challenges ahead

Todd Welch, VP for agricultural loans at Oklahoma’s Gateway First Bank, says that earlier this year he recommended to every client that they sell their winter wheat crops as soon as possible, and most did. Some producers, however, did not heed his advice, perhaps because they had yet to experience a severe drop in wheat prices or suddenly higher costs. Those costs now include skyrocketing property and casualty insurance premiums and higher interest rates, Welch said, adding that political talk about retail price controls has raised concerns about any such measures ultimately squeezing farmers.

“I assume we’re going to see more stress on working capital as we get into renewals this winter,” he says.

As farmers’ working capital dwindles, it becomes harder for banks to renew annual operating loans and farms may have to resort to applying for longer term debt that requires putting up their property as collateral. A farmer might take out a $200,000 loan over 10 years, to bolster operations, Hopkins says, but annual payments must still be made.

“Once that card has been played too many times and there’s no equity left, that’s when you start to see foreclosures and bankruptcies,” Hopkins says. “We’re starting to see that in the Southeast right now.”

David Kohl, professor emeritus of agricultural finance and small business management and entrepreneurship at Virginia Tech, says that his numerous discussions with farmers and their lenders indicate some producers’ mid-year financials revealed significant losses.

“Coming into renewal this winter, the biggest requests are likely to be for refinancing operating money into longer-term debt, and that will require pledging land and producers will have to have a plan,” Kohl says, adding that lenders and regulators alike will scrutinize the plan details much more closely.

Livestock producers buck the trend

While many crop farmers see tough times ahead, livestock producers’ profit margins and capital are holding up better. Nevertheless, they face rising costs, too, especially in states such as Montana and Idaho where land prices have risen significantly, fueled in part by remote workers decamping coastal cities in the wake of the pandemic.

“We’re not on the cliff’s edge but if cattle prices were to fall, then we’ll be in the same situation facing crop producers right now,” says Heather Malcolm, VP at Bank of the Rockies in Livingston, Montana. She adds that cattle prices are cyclical and bound to fall at some point, putting pressure on ranchers if costs remain high.

Farm Bill to the rescue?

Passing a new Farm Bill could relieve or at least lessen the challenges the agricultural industry faces. The bill has 12 titles covering a range of areas, with the credit title particularly relevant to agricultural producers and their bankers. It includes critical components such as the USDA’s loan guarantee program, which the House bill would increase to $3.5 million to buy land, and $3 million for operations, from a $2.2 million guarantee in the current law. Such an increase would help farmers accommodate today’s inflated costs.

Another provision would increase statutory reference prices that trigger payments to farmers from the USDA’s Price Loss Coverage program when the national average market value of a commodity falls below the reference price. Among numerous other provisions, the bill would increase the crop insurance subsidies and policy coverage levels.

“From a bankers’ standpoint, we care about crop insurance because it’s risk management,” Elfmann says. “If 60 percent of a farmer’s crop is guaranteed, then just the remaining 40 percent is where the risk will be.”

Whether the Farm Bill is signed into law this year or is extended for another year remains to be seen, and major challenges remain. Elfmann says that the House Agriculture Committee is working behind the scenes to move the bill along, and in September the agriculture industry and its lender groups met with legislators and their staff. A key argument for signing the bill into law rather than another extension, he says, will be that the cost environment has changed dramatically since 2018, requiring the laws various financial provisions in turn to be adjusted.

“A one-year extension basically extends 6-year-old policies,” Elfmann said. “The world won’t end and farms will be OK, but not as good as they would be under a new 5-year law.”

John Hintze is a regular contributor to the ABA Banking Journal.