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Ag Bankers Sound Alarm on Rising Interest Rates for Farmers

Farmers urged to get familiar with financial ratios.

Financial data from Midwest crop farms still looks better than you’d expect after more than five years of low grain prices, but lenders gathered at the National Agricultural Bankers Conference in Omaha, Nebraska, Sunday got seasoned advice on working with problem loans.

“I really feel we’re in a renewal season on the brink,” said one speaker who is a veteran of the farm debt crisis on the 1980s, Virginia Tech emeritus ag economist David Kohl.

Kohl compares the current ag lending environment to the smoke that preceded the Mt. St. Helens eruption in Washington state. Some of the threats rumbling under the ag economy include continued uncertainty in international trade, the size of farm loans, rising interest rates, and the possibility of declining farmland values.

In the coming year, Kohl’s own dairy operation is looking at the effects from three possible interest rate increases by the Federal Reserve next year, he told The likely increases would be .25%, or 25 basis points.

In a low-margin environment, that can make repaying loans more difficult, he said. And higher interest rates will likely strengthen the dollar. That will make a tough export environment worse for U.S. crops.

Kohl encouraged farm lenders to evaluate the business management ability of their farm borrowers by looking at how well they understand financial ratios, whether they have a marketing plan, and if they know their cost of production, for example.

He also recommends getting farms to write a “one-page recovery plan” for repaying debts and anticipating the effects of changes in commodity prices.

“Everything looks good on delinquency rates, but that could change very quickly,” Kohl said.

Kohl said that at a typical agricultural bank, about 40% are going to grow, the other 40% are in refinance mode, and the remaining 20% are in “demarket mode.”

“The more you do refinancing, you take them further out on the pier, and the water’s getting deeper,” he said.

Kohl’s view that some farms continue to do well while others are slowly going out of business was reinforced by data from FINBIN, a farm financial record keeping system used in 11 agricultural states.

The median net farm income for all of the farms in the system was $32,705 in 2017, said Dale Nordquist, assistant director of the University of Minnesota’s Center for Farm Financial Management.

That’s money available for family living expenses, paying taxes, and growing the business.

“There’s got to be some eating of working capital to make that work,” at that level, Nordquist said.

Farms also show big differences in income. The top 20% of FINBIN farms averaged net income above $200,000 in 2017 while the bottom 20% lost nearly $60,000.

Nordquist said that change in net worth has been stable for the past two years, mainly due to nonfarm income.

But the return on equity remains low, between 0% and 3%, he said.

“No industry can stay at those levels of profitability or rates of return forever,” he said.

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