Agricultural lenders address emerging set of concerns

Ray Mueller

KIMBERLY – With a fourth consecutive year of a decline in net farm income on the horizon, how are agricultural lenders reacting to that fact in serving their clients?

That question was the topic for a panel program at the semi-annual farm management update for agribusiness professionals sponsored by the Extension Service offices in east central counties.

Panel members were Doug Lund, a loan resolution specialist in Wisconsin's Farm Service Agency office, agricultural loan officer Dave Kappelman of the Denmark State Bank, and Dan Gitter, vice president of commercial lending at the GreenStone Farm Credit Services office in Little Chute.

Panelists Dave Kappelman, Doug Lund, and Dan Gitter (l-r) shared agricultural economy outlooks at the recent farm management update for agribusiness professionals.

Lineup of concerns

Lund fears that 2017 could come close to resembling 2010 – in part because some of the 2010 debt that was recapitalized still exists. He described himself as “being nervous about the equity reports in agriculture.”

On the bright side, Lund pointed out that many farm operators made money during each of the past three years despite the overall downturn in several sectors of the agricultural economy. He predicted that they would continue to be successful in the future.

“Credit quality is our number one concern. We need to be honest on the risk ratings,” Kappelman stated.

He said the risk ratings for most of the bank's agricultural clients are down by one notch from 2016.

Kappelman noted that the 10 largest clients account for 36 percent of the bank's agricultural lending volume. The farm portfolio itself represents 36 percent of the bank's business activity, he added.

Gitter cautioned that “averages mask the trend” and stressed that the key for lenders is to evaluate the individual situations. He said most of the GreenStone clients he worked with were profitable in 2016 but noted that a few clients are carrying large volume loans. He wondered if the overall national economy is as strong as it seems.

Dairy sector prospects

Given that the milk volume being handled in Wisconsin is reportedly at 102 percent of the capacity of the state's processing plants, Gitter is worried that the level of basis payments (premiums for quality, components, and volume) on milk checks in the state is going to erode.

He cited the recent milk production report which indicated that the average milk per cow in the state is increasing by one pound per day compared to a year earlier while cow numbers remain stable.
From a lender's perspective, Gitter would like to see contracts between dairy plants and farmers to provide an assurance that the milk will be accepted for a defined period. He realizes this is a new territory plagued with a number of unknowns.
Gitter was pleased to note that a few clients have obtained a letter from their milk buyer addressing the purchase of their milk. Although this is not a guarantee, he said it shows that they have checked on what could be a potential problem.

GreenStone, which is based in Michigan, has learned that dairy cooperatives in that state are offering their members milk purchasing contracts that are no longer than one year and are trying to put a lid of 3,500 cows on their members. Due to surplus production, the all-milk prices in Michigan were well below the national average for many months during the past year.

Kappelman noted that Land O'Lakes is among a few milk procurers in Wisconsin who have asked their producers to put a limit on their shipments. Lund announced that a loan resolution involving 3,000 to 4,000 cows is scheduled for settlement quite soon.

Facing a new era

“The tools of the 1980s do not work today,” Lund remarked. He said it is now necessary to exercise bankruptcy to resolve non-functioning loans.

To cope with today's economic conditions, Lund called for longer-term fixed rate loans. That would be helpful for dealing with significant price changes throughout the period of a loan, he suggested.

In replying to a question, Gitter anticipated more consolidations in the agricultural lending sector in order to provide access to and adequacy of credit. At the same time, however, he expects moderate size dairy farms to remain while smaller ones, particularly those without a succeeding generation, to fade away even if they are in a strong financial position today.

Lund promised that there will always be some “lifestyle agriculture.” In addition, he foresees “a new middle in agriculture” that would be prompted by environmental concerns and economy of scales.

At the moment, “the middle age is missing” in agriculture, given that there are many 30 plus year operators while a group of others have less than five years.

Competition challenge

An emerging trend cited by Lund is that agriculture is moving away from being “truly competitive” and “purely competitive” with “an easy entry.” He asked if competitiveness “will be true in the future” or if a “vertically integrated” process will prevail.

In a wider sphere, Lund referred to the recent international confrontational exchanges about trade policies. He suggested that pressures for antitrust actions might be emerging because the trade arguments are based on antitrust issues.

National banker survey

The farm management update attendees were presented with the results of a survey of agricultural lenders that was conducted from Dec. 14 to Jan. 6. Of the more than 350 responses, 60 percent of them came from the region which includes Wisconsin.

Among the highlights were that 89 percent observed a decline in overall farm profitability, 84 percent cited an increase in overall farm operating leverage, 63 percent noticed an increase in Farm Service Agency guaranteed loans, and 54 percent mentioned an increase in financing by vendors or suppliers.

Nonetheless, the survey respondents indicated that almost 60 percent of their borrowers were profitable in 2016 and that 54 percent will be profitable this year.
Among agricultural commodity sectors, the highest lender concerns were for grains, beef cattle, and dairy. For their own concerns, the lenders listed government regulations, non-bank competition, and the quality of agricultural loans.