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COVID-19 puts ag financial concerns under a microscope

Fed officials are concerned about farmers' working capital.

INDIANOLA, Iowa -- The gloom and doom of the COVID-19 coronavirus continues to keep uncertainty in the agricultural finance sector at a high level.

Nick Paulson, University of Illinois farmdoc expert says that the COVID-19 coronavirus is compounding problems in the already tough ag economy.

With the U.S. jobless claims jumping to 3.283 million, from last week's U.S. data, that kind of economic activity is not helping sentiment.

In Central Illinois alone, grain farmers are seeing an erosion of liquidity and solvency (debt-to-asset ratio), according to Paulson.

From 2003 to 2012, the amount of leverage that central Illinois farmers held trended downward. 

Since then farmers have been adding leverage and it continues, this year, the farmdoc expert stated in a Friday webinar.

"The story remains that Midwestern farm balance sheets are strong. but, from a liquidity and solvency perspective things are not moving in the direction that we would like to see," Paulson says.

Nationally, the U.S. debt-to-asset ratio is reaching 13.5%, but still historically low when compared to a 20% ratio during the 1980s farm crisis.

Net Farm Income

When looked at before the COVID-19 coronavirus pandemic, a positive 2020 net farm income outlook was favorable with above trendline yields and MFP payments similar to 2019.

Farmers could expect a corn price averaging $3.90 per bushel and soybeans averaging $9.20 per bushel, in order to avoid a negative net farm income for 2020.
Post-COVID-19, the uncertainty around net farm income has complicated the outlook, Paulson says

"We've had some commodity price movements, in the last four weeks, at least partially tied to COVID-19. That will effect safety net programs for 2019 crop payments yet determined and 2020 farm program payments," Paulson.

Paulson added, "Price chages are impacting old-crop marketing decisions and the marketing decisions that will be made for the 2020 crop."
Meanwhile, lower energy prices could help farmers on the input expenses side of the balance sheet. However, falling ethanol demand is going to hurt corn usage.

Farm Policy

While Congress passed a $2.0 trillion COVID-19 coronavirus stimulus package, it's unclear how much of it will reach the farm level, Paulson says.

"Of that $2.0 Trillion, about $49 billion will be directed toward food and agriculture. And of that $49 billion, perhaps about half of that will be directed toward production agriculture. We're just not sure yet," Paulson says.
 

Not a Banking Crisis

It's important to note that this current crisis is not a banking crisis of 2008, according to Nate Kauffman, Federal Reserve in Kansas City, Missouri.

There are a lot of reasons to believe that the U.S. economy is still strong, and that this crisis is a shock to the system, Kauffman says.

"It's squarely connected to healthcare. So, any progress going forward will be tied to resolving issues surrounding the virus. Secondly, the big difference with this crisis and others is the global collapse of industries tied to travel, restaurants, and any business that requires group gatherings," Kauffman says.

Agriculture is not immune to the COVID-19 coronavirus.

Even though farm income's were forecast to be going up, pre-COVID-19, working capital is a concern, the Fed Reserve representative says.

As recent as 2015, U.S. farm working capital totaled $125 billion. In 2020, U.S. farmers are expected to have just $50 billion of working capital, according to Kauffman.

"So, if you are a banker looking to finance a borrower who's working capital has been deteriorating, that's a conversation that the lender will continue to have with the borrower to make sure that going forward there are risk management practices being put into place," Kauffman says.

Future Impacts 

Lenders in the Kansas City Federal Reserve region is expecting to see a drop in farm loan repayment rates.

"We could see some weakening in the farm economy, due to the COVID-19 coronavirus, to the extent that a spouse that is working off-farm and providing income to the farming operation. If that spouse's job is impacted by the sharp pullback in the service sector, it might contribute to a weaker ag economy,' Kauffman says.

There have been a lot of concerns about the supply chains. Kauffman says of all of the conversations that the Fed has with companies, there have been no reports of any problems with delivering product.

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