Even with the recent rally in corn prices, grain and oilseed producers still face break-even or losses in most circumstances. This prompts the questions of how long will it be before the sector enters a financial stress mode, and how severe will the stress be at the bottom of the cycle. Some analysts think the stress will come when farmers begin to liquidate last year’s corn, and even more so when they sell their 2015 crop in 2016. However, I think this misses the point, and that a significant number of grain and oilseed producers have already entered the high financial stress phase. Those farmers that were producing corn for $6+ per bushel in 2013 and 2014 have now seen two consecutive years of losses, already making it difficult to find financing. In contrast, those farmers who produced corn at $4 per bushel will experience little, if any, financial stress. The habit of generalizing and talking about “the farmer” underplays the enormous gap between producers, and leads to very unproductive discussions regarding market opportunities.
On top of this generalization about “the farmer”, the U.S. Department of Agriculture (USDA) further muddies the water with their analysis of farm balance sheets. At the recent Kansas City Federal Reserve Agricultural Symposium, it was often mentioned that farm balance sheets are strong, and a financial stress scenario similar to that of the mid 1980s does not exist. But, how can anyone but an individual farmer and their banker possibly know that? In fact, there are currently wide variances in farm balance sheets ranging from strong to weak. Since Wells Fargo has held the title of the largest commercial agricultural lender since 1997, I am afforded the opportunity to speak weekly with a wide range of Wells Fargo Food and Agribusiness bankers across the U.S. And, while a banker serving an almond producer with a good water supply in California has seen nothing but incredibly good results for the last five years, a banker working on loan renewals in Indiana has to wonder about the losses, and the fact that an overabundance of rain may keep the fields from getting planted.
The most recent USDA farm balance sheet poses issues that should be carefully examined. Let’s start with the real money – land. Farm and ranch real estate has a 2015 forecasted value of $2.4 trillion, essentially unchanged from the 2014 estimate. Farm real estate comprises 81% of farm assets. If the USDA gets this forecast wrong, the remainder of the analysis of debt to equity and debt to asset falls apart. And, the USDA has gotten this number wrong. Sure, there are markets like California almond acres, and specialty crops, that have held up or maybe even moved higher, but they comprise only a fraction of the hundreds of millions of acres of farm and ranch ground. There has been a $38 billion drop in crop receipts since 2012, a 17% decline. At the same time, the USDA balance sheet shows land values increasing by $232 billion, an 11% increase. The cost of money for borrowing on land has been flat throughout this period. Livestock revenues have jumped by $33 billion, a 20% increase. Even so, the impact on land values will be disproportionately negative against the larger crop ground in the “I” states.
Another line item on the balance sheet that doesn’t match up with the banker and farmer reality is machinery and vehicle values. The USDA balance sheet shows 2015 values climbing by 5% to $273 billion. Yet, farm equipment manufacturers and retailers have seen large double-digit declines in new equipment sales year over year, and the resale value of used farm equipment has also been significantly reduced. Just as with land, there are areas of financial strength like cow/calf country, and other areas of high yielding specialty crops, but the overall agricultural equipment market has weakened. Both the farm and banker have reduced the expected market value of equipment as collateral, if they are realistic. Land and equipment together account for 90% of total assets, and the USDA is too optimistic specific to their current values. Candidly, the rest of the asset values just don’t amount to much in the grand scheme of things.
The conclusion is straightforward. Debt levels compared to assets and equity are much higher than the USDA’s analysis suggests. Is this a crisis? For the underperforming grain and oilseed producers, it represents a real financial difficulty. Should they need to recapitalize, they will find less equity in the balance sheet then they thought. For the top performers, they will find opportunities to bring in assets at better prices, therefore leading to better returns. The turnover in assets will be much higher than average, and it will be stressful for the sellers in this part of the cycle.