2016 could deepen crop farmers' financial challenges

2016 could deepen crop farmers' financial challenges

Most crop farmers will be OK financially through 2015, but 2016 could be the real test

The Kansas City Federal Reserve's latest ag outlook shows lower farm incomes continue to put pressure on farmers, and even though many will make it through 2015 riding on working capital or operating loans, 2016 could be a different animal.

Assistant Vice President and Omaha Branch Executive Nathan Kauffman and Assistant Economist Matt Clark wrote in their Thursday update that if USDA's outlook for 2015 farm incomes hold, it would represent a 36% drop from 2014 and a 54% plunge from two years ago.

Related: USDA forecasts farm sector income lower for 2015

The Kansas City Federal Reserve's latest ag outlook shows lower farm incomes continue to put pressure on farmers. (Thinkstock/Montana3838)

What's more, the economists say that if the forecast comes to fruition, it would represent the second lowest measure of farm income since the mid-1980s.

Based on information provided in the latest Ag Finance Databook, lenders report that farmers are continuing to take on operating loans, which alters debt structure for businesses.

The update notes that according to the Databook, the volume of loans used to finance operating expenses now accounts for more than half of new non-real estate farm loans originated at agricultural commercial banks. This ratio compares with an average of 39% from 1990 to 2004.

When reviewing operating loans compared to farm income, the picture is a bit concerning, the economists say. Ultimately, producers' ratio of operating loans to net farm income should stay under 1.0. Farmers have been well under this level – at an average of .54 – since the mid-1980s.

But the ratio is slowly creeping up, Kauffman and Clark say. This year, it has reached .99, so it won't be long before it's at 1.0.


Looking to commodity prices
For the scenario to change, crop prices will need to look different. Kauffman and Clark say, however, that it's unlikely given expected large yields and corn, soy and wheat prices that have returned to levels seen before harvest expectations were released.

The economists also note that since 2011, significant declines in corn and soybean prices have been more common than notable price increases.

"With expectations of a relatively strong harvest this year, a substantial rebound in U.S. crop prices before next year’s growing season, then, would likely need to come from significant demand growth or international supply disturbances," they say.

Related: Midwest bankers expect further declines in farm income

Bringing demand into the mix, economists add that there's potentially more concern for crop prices. Both the value of ag products exported to China and domestic ethanol production have declined – offering downward pressure on prices into 2016.

Because of the underlying trends in crop prices, Kauffman and Clark indicate that some producers could be in a bit of a pickle.

"Many producers have remained in a financially sound position through 2015, but a prolonged downturn through 2016 could start to challenge some of those financial positions," they conclude.

2016 could kick off challenges for crop farmers

Read the full report, Tightening Farm Income Continues to Loom, on the Kansas City Federal Reserve website.

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