This is the time of year when farmers are meeting with their lenders to renew farm operating loans for 2016. The past few years have been challenging for producers as commodity prices have fallen, input costs have risen, and severe weather has damaged or destroyed entire crops. With the downturn in the ag economy, multiple years of lost revenue and less than favorable forecasts for 2016, many producers are facing the tough question: can I afford to continue farming?
Without access to capital, the answer to this question is a resounding no.
I’ve worked in the ag finance business in Texas for more than 30 years and have seen highs and lows in the farm sector. Though those in agriculture have always faced risks, those risks have escalated over the past two decades. Volatility has become the norm rather than an infrequent event. In the last five years farmers have experienced a multi-year drought, hail storms in October, late spring freezes, and too much rain literally drowning their crops. Prices for farm commodities have dropped drastically to below the costs of production as foreign subsidies and market-manipulating policies have drastically risen.
As a way to mitigate these risks and make access to capital possible, Congress selected crop insurance as the primary risk management tool for farmers in the last farm bill. The modern crop insurance system in place today replaced ad hoc disaster relief programs ensuring farmers would have some protection against natural disasters. Congress designed crop insurance to be affordable to the farmer, yet accountable, requiring producers to pay premiums for the insurance coverage on their crops and shoulder a portion of losses through deductibles.
INSURANCE ONLY PROTECTION AVAILABLE FOR COTTON
In the cotton industry, a major crop in the 43 counties served by AgTexas, crop insurance is basically the only risk management tool available to producers. It can literally make the difference between farming another year or losing so much a farmer must call it quits.
From the lending perspective, crop insurance provides a guarantee of a minimum income for a lender to rely on to repay loans should a farmer lose a crop. This insurance guarantee makes it much easier for producers to obtain the financing they need to farm. This is similar to the guarantee any car owner would have on their car loan if they got into an accident. Crop insurance is a safety net for some of the events that cannot be controlled.
For perspective, an average family farm in the panhandle of Texas farms between 1500 to 2500 acres and must borrow $500,000 to $1 million each year to produce a cotton crop. Because of the low price of cotton and the high input costs in 2015, many had farm losses exceeding $150,000. On top of the loss, they still have loan payments, living expenses, and the same farming costs to keep operating another year.
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As producers and ag lenders work together to prepare cash flows for 2016, it is extremely difficult to forecast enough income to cover operating loans, meet debt payments, and pay living costs. Especially vulnerable are the young and beginning farmers who face these challenges with limited financial resources. These young producers and multi-generation family farms are the most affected by the volatile prices, increased production costs, and weather uncertainty in their operations.
Some in our country wish to do away with farm programs and any support of a crop insurance system that supports farmers and ranchers who produce the food and fiber that not only feeds and clothes our nation, but also serves other nations around the world. The reality is, without a viable, affordable crop insurance program most of these producers’ businesses will not survive. And if farmers go under, the Main Street businesses they support are not far behind.
Scotty Elston is the Chief Credit Officer at AgTexas Farm Credit in Lubbock, TX.