By Katie Dehlinger
DTN Farm Business Editor
DALLAS (DTN) -- A majority of farms remain profitable. However, their profit margins are smaller than in recent years, and bankers are growing more concerned about their customers' liquidity.
According to a survey by the American Bankers Association and the Federal Agricultural Mortgage Corporation, more commonly known as Farmer Mac, agricultural lenders reported that more than 57% of their borrowers made a profit 2019. They expect 56% to remain profitable through 2020.
However, 82.5% of all respondents noted that those profits were declining.
"Liquidity and working capital have just slowly eroded away with those lower profits," said Bill Gray, market president of Hawthorn Bank in Harrisonville, Missouri. "Most of my producers, when things were good, didn't go out and overspend on equipment. They reduced some debt. Now, they're replacing equipment as they need it. They're making tough decisions and doing a good job of it."
Bankers from across the country shared Gray's sentiments at the 2019 ABA Agricultural Bankers Conference this week, with liquidity topping the ABA/Farmer Mac survey as lenders' top concern.
That's new to this year, Farmer Mac Chief Economist Jackson Takach told DTN.
"In the past, it was usually income or commodity prices, something more related to the annual cash flow," he said. "I think that's a change in the tune of the lenders. They are saying, 'Hey, you know what? I think they're going to be able to cash flow. I just want to make sure they have enough working capital on the farm to take advantage of opportunities, or if there's continued pressure, that they have that strength in the balance sheet to survive.'"
PILLARS OF STABILITY HOLD DESPITE GROWING PRESSURE
Farm incomes peaked in 2013, and Federal Reserve Bank of Kansas City vice president and economist Nathan Kauffman said that, since then, agriculture has wondering when things might get worse, "And maybe even, to some extent, why they're not worse already from what we thought they would be five years ago."
He highlighted eight factors that have helped stabilize the agricultural economy during that time frame: the buildup of wealth and equity from 2004 to 2013; a series of one-off or temporary factors that have provide support, such as the 2014 geopolitical concerns around Russia and Ukraine, South American production hiccups and Market Facilitation Program payments; the fact this downturn is supply induced, rather than a result of demand disruption; the longest expansion in the overall U.S. economy's history; low and relatively stable interest rate policy; the farmland market's strength despite challenging incomes; borrowers' ability to reposition themselves and improve efficiencies; and a more conservative approach among lenders.
"In most of these examples that are economic in nature, there's a good side of it, in terms of how it's providing support. But there's also a concerning side looking forward," Kauffman said. "If and when one of these changes, you will want to be thinking about how that affects agriculture, and more specifically how it affects your version of agriculture wherever you find yourself."
Bankers will be watching the farmland market closely this year, Takach said. His survey found most bankers expect a modest decline in farmland values of 10% or less.
A low supply of land for sale has helped buoy the market, and while some farmers may need to sell a piece here or there to shore up working capital, Takach said another source of land for sale may come from farmers exiting the industry. The Farmer Mac survey found that nearly two-thirds of lenders see the pace of retirements increasing over the next 12 months.
"We may see more supply come onto the market in 2020," he said. "There's just a lot of factors that are pushing it that way. But as long as there's healthy demand, it shouldn't really affect the price. We haven't seen that increase in supply yet." For more on factors that are supporting the land market, please read Land's Linchpin - 1 here: https://www.dtnpf.com/….
MFP INJECTS CASH AS FARMERS CONTINUE TO ADJUST
According to the Farmer Mac survey, more bankers see farmers expanding their operations than in the past few years (48.4% compared to 45.8% last year and 38% in 2017). The government's injection of working capital in the form of Market Facilitation Program payments may have helped some of those expansion plans.
But Takach, like Kauffman, puts those payments in the one-off/temporary assistance category.
"It was a helpful addition, but that's not where I think farmers or lenders want to see the source of repayment," Takach said.
Gray said the extra income from MFP was a lifesaver last year and will be again in 2019.
"What happens when that one-off goes away?" he said. "Farmers will have to make some tough decisions unless the market comes back. We need some sort of assistance through this time period, and I think the government still needs to have something there for them. We can produce, and we're starting to learn how to market. We just need to have a market that's there for them."
He said he's seeing a general trend among farmers in his portfolio toward more pre-pricing instead of selling at harvest or putting grain in the bin while they wait on the market. Some farmers do more than others, but a number of his customers locked in prices this spring on a portion of the crop.
Bankers are also starting to have more conversations about alternative income streams, particularly solar power and hemp production.
Gray said those are still in the talking stage, especially since the bank has concerns about their ability to finance hemp operation. He has reservations.
"Is it a proven commodity or is it going to be -- I hate to say it -- is it going to be another Jerusalem artichoke? We've had emus. We've had llamas. We've had sunflowers. We've had all sorts of different things that were going to be the next cash crop. We just don't know.
"I like to keep to the tried and true: Just be 1% better each time," Gray said.
Katie Dehlinger can be reached at Katie.firstname.lastname@example.org
Follow her on Twitter @KatieD_DTN
© Copyright 2019 DTN/The Progressive Farmer. All rights reserved.