Farm Lending Conditions Update

Last week two Kansas City Federal Reserve economists published an update to current, Q2 2017, agricultural lending conditions for commercial banks. Although they discuss current conditions many of the charts included in their article have year over year comparisons for several factors in agricultural lending. This blog post will review some of those factors.

First half 2017 All Non-Real Estate farm loans were 7% lower than same time 2016. But that same category began to decline in 2014. All farm debt made year over year loan increases have been dropping for about 2 years. This pattern has been true for both real estate and non-real estate loans but the non-real estate loans dropped at a steeper rate. Non-real estate loans have a negative year over year change the last few quarters meaning borrowers are likely working to reduce their debt load. (Chart 7)

 

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However delinquency rates started to rise in 2015 back to over 2%. The last time delinquency rates were above 2% was 2013. Still delinquency rates are not at the 11-year high of 4%. The rise in delinquency rates also fits with the lower repayment rate across six Federal Reserve districts. So although farmers have reduced debt yer over year they are still struggling to stay current. (Chart 10) Chart 10 also shows higher demand for loans giving additional evidence that farm financial conditions are tight.

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Source: Kauffman and Clark, Farm Lending Steady, Risks Remain, 14 July 2017, https://www.kansascityfed.org/research/indicatorsdata/agfinancedatabook/articles/2017/07-14-2017/ag-finance-dbk-07-14-2017

Federal Reserve Beige Book Comments

Periodically the Federal Reserve releases the Beige Book or more formally ‘Commentary on Current Economic Conditions by Federal Reserve District. This book summarizes the comments by Federal Reserve member banks relating to various economic sectors including Agriculture. These comments don’t provide any data but do help to understand trends or new conditions to follow.  You can read the book here: https://www.federalreserve.gov/monetarypolicy/beige-book-default.htm.

Let’s look at some of the comments about agriculture.

Chicago: “The outlook for crop income was unchanged through April and early May despite wet weather slowing planting in much of the District.” Chicago also reported some cold weather damage to some fields. Some dairy operations in Wisconsin had to find new milk buyers when Canada restricted ultra-filtered milk importations. Incomes for hog and cattle improved as prices rose.

 

St Louis: “Agriculture conditions deteriorated significantly due to flooding across the District”. Flooding across the region had hampered planting with cotton being farthest behind in planting progress.

 

Minneapolis: “District agricultural conditions remained weak since the previous report because of continued low commodity prices.” The district noted that planting was slowed by mid-May rains but that planting progress was on a par with the 5-year average.

 

Kansas City: “Persistently weak farm income continued to weigh on the District’s farm economy and agricultural credit conditions. Soybeans prices were lower than one year ago but soybeans remained profitable at current prices. Bankers in the western region of the district were expecting much lower farm income than those in the eastern part of the district. Wild fires devastated parts of the district and reduced cattle and wheat incomes.

 

Source: 31 May 2017 Beige Book, Federal Reserve System

Importance of Dairy Exports

Importance of Dairy Exports

The May 2017 Central Milk Marketing Order “Marketing Service Bulletin” had an interesting retrospective on dairy exports’ importance to the US dairy industry. The bulletin compared the change in total exports volume and dairy product categories since about 2003. Dairy solids exports for 2016 were 14.2% of total US milk solids produced compared to 5% in 2003. The value of dairy exports increased to $7.2 billion in 2014 falling to $4.8 billion in 2016. The 2003 value of dairy exports was approximately $1 billion. This change is even more dramatic when it is noted that before 2003, the US was a net importer of dairy.

The bulletin also points out the important products that are exported as well as the primary importers of US dairy products. Mexico accounts for 25.2% of US dairy exports, Southeast Asia 13.9% and Canada 13.1%. Just over 25% each cheese and nonfat dry milk account for the 2016 export value of US dairy exports. But on a percentage basis only 5.2% of US cheese production was exported while 57% of nonfat dry milk and skim milk powder were exported. Cheese export volume increased by over 5.5X from 2005 to 2016 while nonfat dry milk volume is 2X larger.

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Source: May 2017 Marketing Service Bulletin, Central Marketing Order

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Source: May 2017 Marketing Service Bulletin, Central Marketing Order

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Source: May 2017 Marketing Service Bulletin, Central Marketing Order

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Source: May 2017 Marketing Service Bulletin, Central Marketing Order

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Source: May 2017 Marketing Service Bulletin, Central Marketing Order

How Much is Standing Hay Worth?

Very soon this question will pop up and will ask about selling a full year of production or a specific cutting. Getting a handle on how much either is worth is often just guess work. There is a better way.

First we need to set a price for hay after harvest and then subtract the cost of harvest to get the value of hay standing in the field. At this point someone asks “where do I get those prices and costs?” Let’s get the hay price first. USDA regularly reports hay prices by location, type and quality. For instance, the Nebraska 11 May 17 hay report shows Supreme quality alfalfa, large square bales, sold for $150-155 per ton. Prices for other hay types and qualities are listed in the report. Some reports will include cane hay and cornstalks. All of the quality parameters for alfalfa and grass hay are listed in the report. The web site is: https://www.ams.usda.gov/market-news/hay-reports.

The USDA prices are for harvested hay so we need to subtract harvest costs from the reported hay prices. If a farmer or rancher has calculated their own hay harvest costs, that cost would be subtracted from the USDA hay price. If the farmer or rancher wants to calculate their cost of hay harvest, an available spreadsheet from KSU, https://www.agmanager.info/ksu-machinery-costs, can be used to calculate a large number of machinery costs including hay harvest. Custom rates can be used as a proxy for hay harvest costs as well. Nebraska custom rates are published at: http://agecon.unl.edu/cornhusker-economics/2016/custom-rates. Other states publish custom rates as well.

So now we know what to pay for a ton of standing alfalfa (hay price-harvest cost). But we don’t know how many tons are going to be harvested and payed for. The best way would be to weigh the hay harvested. Sometimes that isn’t possible so a sample of the hay harvested can be weighed and then the total calculated. Another way that has been investigated is to count stems per square foot. A recent study in North Dakota showed that system has a 0.33 to 0.97 correlation to measured yield. Two of the locations had a high correlation and a third had a very low correlation. Thus stem counts may work sometimes. A third way is to scissor cut several random 1 square foot areas to get an average yield and then multiply by 43,560 to get a yield per acre. Don’t forget to correct for moisture though. And cut at the same height as mowing occurs.

Another question sometimes asked regards “how much should I pay for a specific cutting?” If weight is used for payment of the standing hay, then a buyer can pay only for what they harvest. Another way might be to use a percentage of a cash rental rate to pay for a hay cutting. In a 3-cut system for alfalfa the first cutting yields 40% of total annual yield and the subsequent are 30% each. A 4-cut system has 35% of the annual yield in the first cut, 25% in the second cut and 20% for the next cuttings. Thus if a buyer wants just the first cutting of a 3-cut alfalfa field then multiplying a cash rental rate by .4 is way to calculate a price.

Of course the amounts calculated above are starting points in a negotiation. A fair price is the one that two parties agree upon.

Care of Storm Damaged Trees

Recent storms have left some trees damaged and others that require maintenance to survive. This column will provide guidelines on how to care for these trees.
Evaluation of the damage is the first step in care of trees after storm damage. Do not try to take care of tree limbs on or around power line. Large branches that are partially attached and overhanging buildings or areas humans use should be removed first. Clean up debris on the ground before tree repair starts so that personnel safety is increased. Look for hidden damage so that safety hazards are considered before repair work starts.
Remove damaged branches back to the first undamaged branch. Prune back to the branch collar; do not flush cut to the trunk or another branch. In addition, make a pruning cut that produces a smaller wound. When pruning lager branches, use a three-cut method to safely cut the branch. When using chainsaws, use all the proper safety equipment. There is no need to use tree wound dressings or some type of wound paint. These dressings can actually reduce the natural defense and repair methods of a tree. Wound paints may actually be food sources for microorganisms.
All trees that have had major structural damage will need to be removed. This damage does several things that reduce the viability of the tree. It can reduce leaf area needed for photosynthesis; provide entry points for disease and pests. Do not top trees to remove damage. A flush of branches will sprout creating a “witches broom” that is weak structurally. Trees that have had 30% or more of their bark removed during limb breakage probably will not survive. The root connection has been severed due to this bark damage. These trees also should be removed. However, pruning out damaged bark areas will help trees heal. Prune to shape the bark removal area as an elongated football. Portions of a tree with bark damage may die back however.
For the first year or so after storm damage, a tree may produce many unbalanced branches. Remove the weaker or undesirable limbs as they appear. The storm damage and pruning can cause a severe “shock” to the tree. Proper fertilization and tree watering will help counteract the shock. Continued pruning and fertilization will help maintain balance, improve the tree’s health, and help restore its beauty.
When replacing trees, consider what types can be more susceptible to storm damage. Some species less susceptible include Bur oak, Kentucky coffeetree, Little leaf linden and black walnut. Trees that tend to be more susceptible to damage include elms, Silver maple, Honeylocust and Marshall’s green ash. Wait to do developmental pruning of newly planted trees until two to three years after planting. Unless there are multiple leaders and basal sprouts.

Do You Know Your Costs

Farm and Ranch income continues to be a concern for many involved in agriculture. Some indicators I have observed include recently closed machinery dealer locations, landowner concerns for rental rates and land taxes as well as 2017 crop production costs projections. The last, estimated crop production costs, are not your costs. The same is true of cow-calf costs as well. To improve cost control, farmers and ranchers must know what it costs to produce calves or grains. Another very important use of cost of production calculation is to manage crop and livestock marketing. UNL has both crop and beef production budgets which users can download. These are located at:

http://cropwatch.unl.edu/budgets

http://agecon.unl.edu/publications/cattle-budgets

One way to use these budgets is to calculate two cost of production, full and cash flow. A cash flow cost of production (COP) is useful when planning or marketing crops. For instance, what if a local grain buyer offered a minimum price contract for corn at $2.99 per bushel. Is that a price a farmer can live with? If the cash Flow COP is calculated to be $2.45/bushel, the producer knows that with the $2.99 minimum price he or she will be able to pay the bills and then some. But if the cash flow COP is $3.07/bushel some costs need to be cut or higher yields obtained at the same total cost. Or maybe both. A cash flow COP production includes all of the out of pocket production costs, the portion of family living the farm or ranch must pay, scheduled debt payments and all taxes.

Full cost of production is also an important cost to know. In the long run, say more than 5 years, all costs must be recaptured to stay in business. These costs include all cash costs plus investment in machinery, land, breeding livestock and unpaid labor. The UNL crop and beef systems budgets calculate both of these costs. Use these budgets to manage your own operation.

Federal Reserve Releases Ag Economy Observations

18 January the Federal reserve released its January 2017 Beige Book which included commentary on current US agricultural industry conditions. Each Federal Reserve district included comments about their district’s ag industry. Some of those comments are below.

Conditions were reported as somewhat variable in the Richmond district depending on whether hurricane Matthew hit farming areas. Conditions across the southeastern US were difficult in many areas due to a growing season drought. Poor pasture conditions caused stress for livestock producers. Some were feeding corn that might otherwise be sold. Rains did occur that brought relief late last year for the southeastern US. The Chicago district reported very good yields and some modest decline in input costs. The livestock sector saw increased prices. Much the same was reported in the Kansas City district as well as Minneapolis. These districts reported “weaker loan repayment rates than in prior years”. Cash flow is reported to be tighter and income lower is compared to prior years. Winter wheat plantings were reported to be 95% complete but little snow was present as of 1 Jan 17 for insulation of the crop. Record yields were reported in the Dallas district. Cotton yields were very good which pushed prices below or near breakeven. But cotton economics are better than wheat economics. In the San Francisco district, dairy economics have improved but investment in dairy is weak due to CA milk prices versus the Midwest milk prices.

More comments can be read from the news report below.

https://farmpolicynews.illinois.edu/2017/01/federal-reserve-observations-ag-economy-january-17/