Low commodity prices continue to haunt ag
BankBeat
By: Cara Roberts Murez
Editor’s note: This is the third part in our series on the state of ag as we round the corner into 2021. Previously, we asked regional ag banking experts about the trends they saw this past year, the impact of COVID-19 and the weather. Up next: what’s ahead in 2021.
The year began with some optimism on grain prices and improved trade conditions with China, Canada, Mexico and other countries. Then COVID-19 hit in March and everything changed.
Commodity prices for crops and livestock dropped rapidly, ethanol demand dropped and plants closed or reduced production, processing plants closed due to virus outbreaks, many hog producers were forced to euthanize animals, livestock and milk prices were well below breakeven levels. For meat producers, prices dropped when the coronavirus forced processing delays. School closures and restaurant slowdowns also impacted food producers.
No one has been immune from the struggles the pandemic has wrought on the nation’s health or the economy, including farmers and their community banking partners. Ag banking experts from across the region weigh in here on the local impact.
How are five years of low commodity prices affecting agriculture?
Kent Thiesse, senior vice president/senior ag loan officer, MinnStar Bank, Lake Crystal, Minn.: “The continued low commodity prices have greatly impacted working capital in many farm operations and resulted in some farmers being unable to repay farm operating loans at year-end. This was especially true at the end of 2019 in areas that were impacted by poor crop yields, and with dairy producers. It will also likely occur again at the end of 2020 in areas that were impacted by natural disasters, as well as with some livestock and dairy producers.
“In recent years, many ag lenders have restructured some short-term ag loans into longer-term financing that is secured by real estate. The problem has been that due to low commodity prices and tight profit margins the cash flow ability has not always existed to service these additional loans. For some producers the situation looks a bit more favorable as we reach the end of 2020, but for others the financial challenges will continue into 2021.”
Darla Sikora, senior vice president/ag loan officer, Citizens State Bank of Loyal, Wis.: “From a loan standpoint, we work with each individual farm to structure loans in ways that work best for a particular farm. For many, this has included moving debt “down the balance sheet” by securing what we can with farm real estate. Real estate secured loans allow for a longer amortization and lower interest rates (as compared to debts secured with chattel), to assist our borrowers in their cash flow by alleviating some of the annual debt service requirement. With the softening of interest rates earlier this year, we have also rewritten many of our farm loans to lower rate products, which is helpful.”
Ryan Cox, vice president/ag banking manager, CBI Bank & Trust, Muscatine, Iowa: “Technological advances in nearly every area of agriculture have made us very efficient at producing these commodities. The increased supply we’ve seen in the last five years has pushed commodity prices lower and forced farmers to cut expenses just about everywhere they can. However, when there are no more expenses that can be trimmed and commodity prices continue to drop, it can make for some pretty difficult financial decisions. As lenders, we have worked closely with our farm clients the last few years to restructure debt and recommend adjustments they can make to improve their balance sheets and maintain creditworthiness.”
Shan Hanes, president and CEO, Heartland Tri-State Bank, Elkhart, Kan.: “A farmer would basically have to sell 100 percent of production at the high every year to be profitable. That is simply never going to happen. … We constantly look at all options for each producer which includes restructuring, FSA guarantees, Farmer Mac to obtain long-term fixed rate financing, and sometimes liquidating some or all assets. Fortunately, land prices have remained stable.
“Overall net worth on the financials has increased for most producers each year; however, working capital and debt coverage has declined considerably. Thus, we have viable options but all take time and patience to complete. Both bankers and producers need the same patience from regulators as these restructuring plans unfold. For us, while regulators do expect to see a realistic restructure plan, they have afforded us the patience to allow this restructuring process to occur.”
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