The US agricultural economy has had a tough ride in 2015. Recently the Kansas City Federal Reserve (KCFR) reported the 2015 Net Farm Income (NFI) Index at 55 (2004=100) and the operating loan index at 150 (2004=100). The NFI index is at its lowest and the operating index at its highest since 2004. Those data points reflect ongoing KCFR declining credit conditions. (Figure 1)
Source: Kauffman, KCFR
You will notice that the district agriculture loan repayment rate has been trending down since 2012 while loan renewals and extensions have been trending up. Farm loan demand is obviously up as well. KCFR found short term 1st Q 2016 short term lending 20% higher than historical expectations would lead one to believe. District ag lenders expect some deterioration of those credit conditions. The current credit conditions are related to profitability which the KCFR summarized in their findings. KCFR found that lenders believe:
- Due to strong US and world production and relatively high production costs and weaker world demand, NFI will continue to be weak.
- Tightening credit conditions will effect lending to farmers and ranchers.
- Downward pressure on cash rents and farmland values will continue due to weaker NFI.
- The broad US rural economy will weaken.
- For farmers and ranchers who have a strong financial position there will be opportunities to gain control over additional land and cattle.
One ag economist, Greg Ibendahl Kansas State University, suggests that loan delinquency rates are a trailing indicator for financial strength because it takes a couple of years for them to develop. A better indicator then would be working capital and NFI. Farmers will often use their working capital to pay down debt early on but if NFI drops too, working capital won’t get rebuilt. After working capital drops off farmers will sell off assets like extra machinery to generate cash for debt repayment or reduction. Eventually if NFI can’t be increased and or expenses reduced, the debt delinquency rates will increase.
Rabobank serves the US agriculture industry as well as various EU and Asian clients. Thus their analyses often include a world perspective also. Periodically they review the ag complex. Their most recent analysis covered the corn and protein complexes. In early April fed cattle prices were thought by Rabobank to have trouble reaching $140 per cwt. and that has turned out to be correct with nearby CME fed cattle near $120 falling from $130 in mid-March. Feeder calf prices have weakened since their April analysis was published. Rabobank mentions that very heavy carcasses continue in the beef industry and are a drag on prices since they increase beef supply with the same cattle numbers. Sterling Marketing’s Beef Profit Tracker” continues to show beef feeders losing money as of 29 April, -$74.64, and their analysis going back 1 year shows losses as well. Under that scenario feeder calf prices will decline further, but feeder calf supplies are lower than usual due to the recent drought in cattle producing areas.