Sitting under a machine shed after making the morning rounds of his fields in June, farmer Tony Schwarz of Weiner made a prophetic statement.
“If beans go to $11 [per bushel], it’s gonna be hard for some people to pay out” their crop production loan, he said.
Starting in July, soybean contracts started downward, hovering between $9.60 and $10 per bushel for the rest of the year.
Bumper crops certainly depressed prices and uncertainties tied to federal farm bill legislation didn’t help either.
In January 2012, soybeans were selling for $14.19 per bushel. Last January they were at $9.87. Corn in 2012 was at $6.98 per bushel while in January it was $3.86.
Rice in 2012 was $14.86 per hundredweight and in January it was $10.39.
Those factors are pointing to a more rigid lending environment for agricultural producers, not just row-crop farmers.
Lee Conditt, Batesville market president with Merchants & Planters Bank, acknowledged that bankers are sharpening their pencils, if not purposely scaling back agricultural lending.
“We have not made a conscious decision to tighten our lending standards in any segment of ag lending,” Condit said. “Crop loans are a big part of what we do and we will continue to make them. We will work with our existing customers within prudent lending guidelines. Yes, crop loans will be harder to obtain in 2015, and we are not necessarily looking to take on any new crop loan customers.”
For row-crop operations, ag loans consist mainly of two types — production loans that provide working capital to put in a crop and work through the year to harvest and capital loans that farmers use to buy land or equipment.
Over the years, and with flexible market conditions in any given year, production loans have been getting marginally more difficult to obtain. However, established farmers with a track record of solid production have by and large not had difficulty obtaining their production loan each year.
“Crop production loans in the previous three to four years have been readily available, due mainly to the fact that most farmers were able to pay out for any given year and likely make their term loan payments as well,” Conditt said. “Crop production lenders have had a fairly easy time of it over that period of time. Commodity prices have been pretty strong over that time frame as well.”
However, this year is shaping up to be more lean.
“Production loans are going to be more difficult in 2015 as crop prices fell mid-year 2014 and have not recovered, resulting in some producers not being able to pay out,” Conditt said. “[In 2015] loans in many cases will likely require some refinancing of carryover. Lack of equity in the producer’s balance sheet will be a big detriment to this refinancing.
“There will be some fallout of farmers in 2015. I am already seeing some land available to rent because the previous operators were not able to get financing for the 2015 crop.”
One line item will be most important, Conditt said.
“Production loans are going to be more difficult to cash flow for 2015 with the decline in commodity prices and the absence of government payments,” he said. “Here at my bank a large percentage of crop loans are made with a 90-percent Farm Service Agency guarantee. I expect that we will continue that trend. However, even with the guarantee, the loan must cash flow.”
Conditt said that the end of direct payments under the new iteration of the federal farm bill is part of the reason loans will be harder to come by.
“The absence of government payments will have a significant impact for 2015 from a lender’s standpoint. In many cases the government support was the only thing that allowed an operation to have a positive cash flow,” Conditt said. “There will be some operators unable to obtain financing for 2015 due to the inability to show positive cash flow, especially given the forecast for commodity prices for this year.”
Andrew Grobmyer, executive vice president of Agricultural Council of Arkansas, said officials of that organization confirmed those facts firsthand.
“We had our annual meeting back in December with our board of directors, and we had some guest speakers who came in to speak about the lending environment,” he said. “It was an eye-opening presentation to where times have changed for going out and getting loans. Farmers are expected to meet more requirements from their lenders, be it capital ratios or be it facilities, equipment, irrigation practices or other risk management practices.”
Grobymer said that even in a more cautious lending landscape, many of the state’s row-crop producers should be in a good position.
“I think everybody is being a bit more cautious about things, but I think that most of our members are in pretty good shape with their lenders, and it won’t be that big of a challenge to comply with whatever additional requirements are put in place,” he said.
For poultry producers, a robust market is pushing expanded infrastructure, but those loans come with a high price tag.
“Poultry is big in this area, and there is a big push for more production,” Conditt said. “There is some credit available, the lion’s share of these loans are being made with a 90-percent FSA guarantee. A loan for a four-house broiler complex can reach close to $2,000,000.”
He added that poultry operations are a bit more volatile, especially for those new to the industry.
“We are seeing several young first-time applicants obtaining guaranteed loans,” Conditt said. “I expect there will be some opportunities to refinance some of these loans in a few years as some of these first time growers realize how labor intensive these poultry operations are.”
Want to buy a herd of cows? Good luck.
“We do make cattle loans. They can be difficult,” Conditt said. “Keeping track of cattle is hard to do and periodic inspections are a must. Cattle prices are at historical levels currently, but the good operators are making money. There will likely be an adjustment coming in the cattle market sooner rather than later. Lenders who have made loans on cows valued at $1,500 today better be looking at additional collateral, as these cows could be worth $1,000 each three to four years from now.”
In recent years, market prices have been relatively strong, and that fact, along with changing investment strategies across the country, have led to a steady increase in the price of cropland in the state. It is not unusual for an acre of row-crop land to sell for $4,000. Compared to a half-acre residential lot in a desirable subdivision, that price sounds relatively inexpensive.
Consider: A section of farmland, not a large farm by any means, is 640 acres. At $4,000 a pop, buying a section requires a check for $2,560,000.
Want to buy a new combine? That could run to $500,000.
Those numbers are wearing out calculators across the Delta, and they are also keeping many young people out of farming, unless they have a familial “in”.
“When people cannot make any money with your money, you would rather invest it in land,” said Dr. Lanny Ashlock, of the Arkansas Soybean Promotion Board. “For a while, land just kept going up. As long as commodity prices were going good, it was kind of like the 1980s. Land prices just kept going up. How could you go wrong?
Well, we had three or four really harsh years, and all of the sudden, you were upside down.”
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