Area ag lenders tightening up on loans, according to survey
At the Siouxland Agricultural Lenders Seminar on Nov. 1, we surveyed the participants as to what they were seeing in their ag loan portfolios in light of the current ag economy. The 58 attendees were from five states and represented 20
lending institutions and 13 other ag industries. More importantly they represented service to over 500 dairies, 317,725 milking cows and 108,400 acres producing feed for those cows.
Last year we asked them to identify the number one economic issue affecting their dairy clients and the response was low milk prices and labor issues. In this, the fourth year of economic stresses, it was no surprise that the overwhelming
concerns were low milk prices and cash flow issues.
Another second year question was what percentage of their clients were going to expand operations, exit dairying or add robotic milkers in the next five years. In 2017, over 73 percent of the lenders indicated their clients planned on expanding herds; Fourteen percent predicted at least one of their clients would exit the industry; and 17 percent believed that one or more of their clients would add robotic milkers to their operations. In 2018, only 39 percent of the lenders indicated that one or more of their clients planned on expanding herds; ten percent predicted at least one of their clients would exit the industry; and only ten percent believed that one or more of their clients would add an automatic milking system to their operations.
The new questions for 2018 helped us better understand the state of farm loans in Siouxland. First we asked if the lenders portfolios had more “at risk” accounts today than in 2017; 90 percent indicated more “at risk” loans, no lenders indicated less and just over 9 percent indicated the same. We followed up asking if they were rejecting or reducing more operating loan requests than they did in 2017, and 45 percent responded that they were rejecting or reducing more operating loan requests, while 55 percent indicated loan actions were the same as in 2017. When asked if they were seeing changes in alternative and vendor financing, 71.4 percent were seeing an increase; 25 percent were seeing no change and 3.5 percent were seeing a decrease.
We then asked the lenders to indicate the changes they were making to respond to the weak farm income. They were given five options. The chart shows their responses.
One new revenue-based risk management tool discussed was the Dairy Revenue Protection (DRP) program offered through crop insurance companies. It has two options. For each quarter, producers decide whether to protect the value of Class III and Class IV milk or milk components (fat and protein).
After that, the producer will decide how much production to cover and what quarters to cover. Similar to other crop insurances, it protects revenue, not profit. Since lenders and borrowers are familiar with other crop insurance, this is a readily
understandable risk management tool.
For the industry and rural communities, these changes show the effects of four years of low milk prices. Borrowers are re-thinking expansions and fine-tuning operational decisions to capture every dollar of margin. Lenders are actively comparing financial reports to current industry benchmarks looking for “cracks” that can signal potential problems in the future.
Businesses that support the dairy industry are working with clients to help them improve efficiencies and weather these stressful times. While an up-tick in milk prices seems likely in 2019, many dairies will still have to trim their cost of production to move into a break-even statistic.
–Iowa State University Extension
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