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Banks are taking back more farmland through foreclosure than at any point in the past three years as low crop prices, epic flooding and the Trump administration’s escalating trade wars abroad have left many farmers struggling to pay their debts.
An estimated $208.2 million in real estate-owned farmland was on bank balance sheets as of June 30, according to Federal Deposit Insurance Corp. data released last week, up nearly 3.5% from three months earlier and more than 15% from same period last year.
That figure is likely to keep rising until the U.S. and China resolve their long-running trade dispute, lenders say.
The two countries have exchanged tariff hikes on agriculture and other products for the past year, prolonging a slide in crop prices that began midway through the decade. Moreover, severe flooding across large swaths of the Midwest earlier this year delayed planting for many farmers, and some will likely have to sell off land or equipment this winter to avoid suffering steep losses for the year, said Shawn Smeins, the deputy head at Rabo AgriFinance.
“I wouldn’t be surprised if it does grow,” Smeins said of the foreclosure figure. “You have to be concerned when you have this many years of continued losses.”
Internal forecasters at Rabo AgriFinance in St. Louis, a unit of Rabobank in the Netherlands, warned executives five years ago that 2019 would be a tough year in ag banking because of the pressure on commodity prices. But they didn’t expect then that hard times would stretch out as long as they may potentially go with trade talks grinding along.
Dave Dannehl, the CEO of the $145 million-asset First State Bank in Loomis, Neb., and former chairman of the Nebraska Bankers Association, said that farmers generally support President Trump’s stance on China, but he acknowledged that their patience is being tested as U.S. soybean exports to China continue to plummet.
Soybean commitments to China for the week that ended Aug. 1 totaled 14.5 million tons, down from 27.9 million tons during the same period last year and 36.3 million tons for the same week in 2017, according to data from the U.S. Department of Agriculture.
Farmers “believe in these policy decisions,” Dannehl said. “They believe the trade imbalance needs to be corrected, and they don’t want the administration to cave in. But they are feeling it, and they are feeling a little more impatient.”
The amount of money farmers are expected to take in from selling crops this year is expected to fall to $193.6 billion, according to USDA estimates, which would be the second-lowest annual total for the decade. Overall net income for farms is expected to bounce up, however, buoyed by a series of government payouts.
This year’s $16 billion bailout for farmers has begun trickling out to help cover some losses. The payments come after a $12 billion bailout was approved last year.
Financially, bankers are not yet feeling too much pain from the problems plaguing farmers.
Banks with at least 25% of their loans and leases tied up in farming reported a combined $968 million in net income for the second quarter, up about 1.1% from the same period the year prior, according to the FDIC.
Banks’ income could be holding steady because bankers have been successfully persuading struggling farmers to sell off land to pay off old debts and avoid foreclosure or to secure the needed liquidity to qualify for financing needed to make a run at next year’s vintage of crop prices, according to Chris Kalkowski, vice president for agribusiness banking at the $21.3 billion-asset First National Bank of Omaha in Nebraska,
When Kalkowski was driving through the northeastern part of the state earlier this year, he noticed more “for sale” signs popping up.
“That to me is a sign that banks are saying, you need some more liquidity,” Kalkowski said.
Most farmers have plenty of equity in their land that can be used as collateral for operating loans, but the concern for lenders is that land values will drop if crop prices continue to decline.
Farm sector real estate debt is expected to creep past $257 billion this year, the USDA estimated at the end of August. That would be a nearly 5% increase from 2018 and a 23.5% increase from 2014.
A forecast debt-to-equity ratio of 15.6% for farms in 2019 is expected to be the highest since 2009, according to the USDA.
“It’s going to be a challenge to find ways to continue financing them if their equity continues to deteriorate,” Dannehl said.