Minding Ag's Business

Cash Rents a Culprit in Credit Defaults?

Cracks in ag credit are beginning to surface, especially for large scale crop farms that expanded with top-dollar cash rents in recent years.

The first signs of financial stress are hitting the Farm Belt, as DTN's Elizabeth Williams reported this week (see "Credit Begins to Crack" on the Farm Business page http://goo.gl/…). Farm equipment dealers, bankruptcy attorneys and financial consultants are seeing an uptick in credit disputes, with much of the problem concentrated in fast-growing grain operations with more than 7,500 acres, her sources said.

In fact, agricultural bankruptcy attorney Joe Peiffer of Cedar Rapids, Iowa, told Elizabeth that four out of the last five farmers who sought his advice had accumulated more than $4.37 million in debt each, too large for them to qualify for special agricultural terms under the Chapter 12 bankruptcy reorganization.

Signs of distress have been growing, although the fissures aren't huge yet. In mid-March, DTN reported a flurry of last-minute cash rent auctions and rate renegotiations that knocked $100/acre off some higher-priced 2014 Iowa rents for the new operators. Obviously not all landowners with multi-year leases were sympathetic to their original tenants' pain: When a grower backed out of a three-year lease for $150,000/year, Peiffer reports the owner threatened to file suit for full-payment on years two and three. The landowner also wantsreimbursement for the $30,000 cut he shouldered this spring, when a substituterenter offered to pay only $120,000.

Contracts may be contracts, but one tenant told me this spring "some landowners seem more intent on breaking their renters than on bending."

P[L1] D[0x0] M[300x250] OOP[F] ADUNIT[] T[]

Ironically, agricultural loan data released by the Federal Reserve and the Farm Credit System Funding Corporation within the last week reflect little of this heartburn in farm country yet. In fact, overall loan quality for the Farm Credit system barely budged between 2015 vs. 2014.

Loans classified under the Farm Credit Administration’s Uniform Loan Classification System as“acceptable” were 98.0% at March 31, 2015 and 98.2% at December 31, 2014, the System's Funding Corporation reports. Loan delinquencies (accruing loans 30 days or more past due) as a percentage of accruing loans remained at a low level of 0.28% at March 31, 2015, as compared with 0.30% at March 31, 2014.

What to make of these confusing signs? Keep in mind that about half of all farm operators run virtually debt free, points out Texas A&M economist and DTN Farm Business Adviser Danny Klinefelter. Those who own their farms can outlast almost any cycle. Others have not suffered repeat weather disasters or shoulder carryover debt, so their cash reserves and liquidity may be more intact than those with low yields in 2013 and 2014. Some diversified livestock operators stockpiled cash last year and still sit on a virtual war chest.

Klinefelter makes a rough estimate that if commodity prices stay this low another year, perhaps 30% of the commercial farmers "won't necessarily be bankrupt, but could have real trouble getting financed in 2016."

The higher risk operations are concentrated among those commercial farms with over $500,000 annual sales who cash rent a high portion of their operations, Klinefelter adds. They may have multi-year cash rent commitments that "make no sense under current commodity prices" but deal with landlords reluctant to give concessions. They may be shouldering carry over debts from past years, something lenders like to refinance only occasionally.

Up to now at least, most heavily indebted grain operators could escape more gracefully than in the 1980s, thanks to land prices at more lofty levels. We've all heard stories of hard pressed farmers who scaled back their rental acres or equipment lines, or sold farmland to raise a little cash in 2014. Some proactively restructured their debt as early as last summer, perhaps financing some equipment they had initially paid in cash.

But it's time to prepare for hard negotiations on excessive 2016 rents or risk serious levels of farm failures a year from now. Just hope landowners recognize the seriousness of the situation.

Follow me on Twitter@MarciaZTaylor

P[] D[728x170] M[320x75] OOP[F] ADUNIT[] T[]
P[L2] D[728x90] M[320x50] OOP[F] ADUNIT[] T[]

Comments

To comment, please Log In or Join our Community .

Raymond Simpkins
5/13/2015 | 6:58 AM CDT
To unknown. What are you talking about? An acre is an acre, it cost as much to plant one acre as it does one thousand on a per acre bases. Unless you have to much eqiupment and if you do sell some. If your going to lose or breakeven on what you have than sure sounds like good business to farm more!!!! DAH.
Unknown
5/12/2015 | 9:21 PM CDT
your poor cash flow is not my problem. I need more ground to lower my cost of production.
Pedro Sanchez
5/11/2015 | 9:18 AM CDT
Ray, hence my " " around necessity in my comment.
andrew mohlman
5/8/2015 | 8:01 AM CDT
This country has a cheap food policy that needs thrown in the trash.If a disaster hit earth a tree month supply of grain is not a surplus large supply talkers would have to eat there words cause my bins will be locked. treat others how you been treated not very good.
Raymond Simpkins
5/8/2015 | 5:24 AM CDT
Pedro,It was not necessity.It is greed! No one twisted your arm to pay big rents. Just sit back and wait.
Pedro Sanchez
5/6/2015 | 1:59 PM CDT
While cash rent may not be a culprit for some, it is for others. Some high cash rents came out of "necessity" that someone else was willing to pay more rent and therefore the farmer had to up it or lose it. It's a huge balancing act. However, the landlord has the ultimate power in the situation. He asks for what he wants, and either gets it or finds someone else. I for one would think that as a landowner, I want the best for my ground. If I don't want someone mining my ground or not taking care of it properly because there is no profit for the farm tenant, then I need to be reasonable and lower the rent to a level both parties can find acceptable. Finally, I don't care that corn was $7 in 2012 and you didn't get the top cash rent in the county (I hear this as justification for high cash rents or rental rates increasing). I didn't have corn to sell more than likely. It's why it got that high in the first place.
Bonnie Dukowitz
5/6/2015 | 7:43 AM CDT
It is hard to feel for either the owner or the renter at ridiculous numbers. Suits to collect, good grief, you can't squeeze blood out of a turnip. It would be interesting to know what per cent of the cropland is represented by the 2% unacceptable loans.
Wally frey
5/6/2015 | 6:00 AM CDT
cash rent is not the culprit, save your money in the good times and stop blaming the land owner