This year has brought a slump in commodity and livestock prices and this has generated a lot of questions in farm and ranch country as to what effect will this have on the ability for farmers and ranchers to borrow capital from their Ag lender.
Farrah McGregor is a branch manager for Northwest Farm Credit Services (NWFCS) in Great Falls, Montana and helped answer that question with the Northern Ag Network’s Russell Nemetz during the Montana Grain Growers Association (MGGA) Convention.
Ranchers have also seen down turn in prices this year after enjoying several straight years of record prices but Farrah says this is could create some buying opportunities.
The USDA says farm assets and equity are both expected to fall in 2015 compared to 2014, while farm debt continues to rise. The value of farm assets is expected to decrease by 2.8 percent in 2015. In contrast, farm debt is expected to grow by 6.3 percent. Given the drop in farm sector assets and increase in debt, farm equity is forecast to fall by 4.0 percent. Since last declining in 2009, sector assets increased rapidly as low borrowing costs, high agricultural commodity prices, and rising farm income led to a strong demand for farm assets, particularly real estate and vehicles/machinery. However, this trend has been broken and farm asset values are expected to drop along with commodity prices and farm incomes in 2015.
Farm Sector Assets
Historically, farmland values have driven changes in the total value of farm sector assets; over four-fifths of the sector’s assets are held in real estate, including land and buildings. Accordingly, the expected 1.6-percent decline in the value of farm real estate drives the projected decline in farm sector asset values in 2015. Farmland values have increased rapidly in recent years, as high crop prices and low interest rates led to strong demand. With lower commodity prices and income, farm real estate values are expected to decline modestly in 2015. The decline in real estate asset value also reflects a small projected drop in the amount of land in farms, continuing a gradual, historical decline.
Other farm assets—investments and other financial assets, inventories, and machinery/vehicles—are also expected to decline in 2015. Vehicle and machinery assets—the second largest farm asset class—are forecast to decline 1.2 percent as capital expenditures on these items are forecast to decline. The value of purchased input inventories—which includes pre-purchase of production inputs for future use—is forecast to fall 4.2 percent in 2015. This decrease reflects declining farm income and lower expected prices for pre-purchased production items. With less income available in 2015, farmers are expected to draw down some of their financial assets.
Crop and livestock inventories are both expected to fall in 2015, albeit for different reasons. Lower overall prices for inventory crops decreases the value of existing inventory stocks. Additionally, the sector is expected to draw down crop inventories by $5.8 billion in 2015, contributing to the $13.6-billion decline in crop inventory value.
Farm Sector Debt
Farm sector real estate debt is forecast to increase 6.1 percent in 2015, to $208.2 ($189.6 billion in inflation-adjusted terms). Land prices rose sharply over the last several years, before recently moderating. Although 2015 end-of-year farm real estate values are forecast to decline slightly at the sector level, interest rates have remained accommodating and agricultural lenders—particularly commercial banks and the farm credit system—continue to report strong growth in farm real estate loan volumes throughout 2015.
Nonreal estate debt is forecast to grow more quickly in 2015, rising 6.5 percent to $159.2 ($145.0 billion in inflation-adjusted terms). The forecast drop in farm income is expected to reduce the amount of cash available to cover expenses. Farmers have historically borrowed against their equity in periods of declining farm income, and lender reports continue to suggest an increase in demand for nonreal estate debt financing.
Bottom line whether you’re a grain farmer or a rancher…2016 is just about here and with it will come new challenges and opportunities. Take Farrah’s advice to manage your risk and deepen that relationship with your Ag Lender
Source: Northern Ag Network, NWFCS & USDA