Despite continued deterioration of the U.S. agriculture economy, Farm Credit remains committed to meeting the needs of borrower members and will rely on a strong capital position, knowledgeable staff and deep experience with government institutions to accomplish that goal.
In an April 21 ag media webinar, Farm Credit CEOs from three distinct regions discussed the impact of five years of declining ag commodity prices and the further erosion from the coronavirus pandemic.
Tracy Sparks, Yosemite Farm Credit, Turlock, Cal.; Bill Johnson, Farm Credit Mid-America, Louisville, Ky.; and Pat Calhoun, AgSouth Farm Credit, Statesboro, Ga., agree that rural America was in distress before the pandemic hit and expect further deterioration of agriculture and loan quality as the disruption plays out.
They say overall credit quality remains positive but anticipate restructuring debt, interest only payments, deferring loans and standing down on forced collection actions, among other options, to assist customers.
Dairy hit hard
Sparks says the dairy industry, depressed before the pandemic, has suffered significant damage as school closures and distribution avenues have closed because of the virus.
Dairy and almonds make up 58 percent of Yosemite Farm Credit's loan portfolio. "Overall Credit Quality as of year-end 2019 remained 'good' at 96.76%," Sparks said. "However, trends show Special Mention Credit increasing as a percentage of the portfolio, mostly attributed to softer dairy commodity prices."
She said almonds have performed better and loan quality remains above average, compared to other commodities.
Before COVID-19, Sparks said, California agriculture was experiencing challenges from declining commodity prices due to export trade restrictions from retaliatory tariffs, labor shortages due to a reduction in border access for workers and a decline in water availability and subsequent increase in costs to Farm Credit members.
After COVID-19, those disruptions continued, along with others, including concern for health and safety within the community and internal and external business interruption.
"We also see an adverse economic impact to several commodities we finance due to supply chain disruptions, reduction in retail food consumption, increased unemployment, increased personal and business stress and overall economic adversity that has affected not just agriculture but our entire community," she said.
Weakened safety net
"The safety net for farmers has been severely reduced," Johnson said. "Weak earnings and reduced inventory values will add to stress in 2020. Without adequate net earnings, replenishing working capital with new term debt may be counterproductive." Farm Credit Mid-America covers Illinois, Indiana Kentucky and Tennessee.
"We are prepared for adversity," says Calhoun, with Farm Credit AgSouth, which covers 93 counties in Georgia and South Carolina. "We have made $57 million in loan deferrals since March 20. And loan activity continues. We handled around 2,100 loan and servicing actions from March 1 through April 15." AgSouth made $214 million in new loans over that period.
He said Farm Credit is mission sensitive and will meet the credit needs of borrowers. "We understand agriculture in good times and bad."
Johnson said grain markets are weak. "Few grains are projecting profits. Reduced ethanol production affects corn and exports of all commodities will be critical."
He said Market Facilitation Program payments were the primary source of net income for many grain producers in 2019.
That program needs to continue in this unprecedented time, said Todd Van Hoose, Farm Credit Council and webinar moderator. "I think we will have to have more MFP payments and we will encourage Congress to work on that," he said.
The pandemic and social distancing recommendations are changing the way Farm Credit does business. "Flexibility is the key to assure safety of customers and staff," Johnson said. "We have drop boxes so customers can drop off payments."
All three CEOs say office staffs are limited to two at a time. Some 85% of staff works remotely. They are encouraging appointments and working as much through electronics as possible.
Johnson says he's doing some new age and old-school customer service, "signing documents on the hood of a pick-up and using technology, electronic signatures and other options. These were available but the shutdowns have pushed us to roll them out. This likely will become the way we do business. But we still value personal interaction.
"In some cases, customers will need to make changes in their operations," Johnson said. "Rural First customers are being offered deferments and re-amortizations. We have the capital base and commitment to support our customers."
Sparks says many customers are reworking loans. "Restructuring long-term debt to take advantage of low interest rates is a good idea," she said. "It's good for membership."
Farm Credit has worked with a few members to apply for SBA loans made available in the recently passed stimulus program. Van Hoose said Farm Credit had to work to convince Congress to approve Farm Credit members for the SBA guaranteed loans and he hopes they will be approved with the next round.
"I think funds will be available for no more than 72 hours," he said. By the time some Farm Credit applications were finalized in the first round, the funds were gone, he said.
Johnson noted that corn prices are 50 percent lower than at their peak about five years ago and COVID-19 is pushing commodity prices even lower.
"Commodity prices were already suffering from a five-year downward trend," Calhoun said. COVID-19 adds another strong headwind to any opportunity for recovery.
All three CEOs say Farm Credit remains in a good position to service borrowers. Loan quality has declined somewhat in the last five years, "but we started from a strong position," Johnson said.
Strong capital positions, flexibility, diverse portfolios and experience with institutions like SBA and FSA will be crucial they said.