Category: Farm Management

As mentioned in previous Southern Ag Today (SAT) articles (Martinez and Ferguson 2022), monitoring Non-Real Estate Farm Debt provides insight into debt health. Last year had periods of drought and increased input prices for producers. At the time of this article, planting is complete, producers are bailing hay, input prices have come down, and cattle prices are the highest since 2015. But, through the first quarter of 2023, there are mixed signals from the most recent call reports. As a refresher, every commercial bank in the U.S. submits quarterly Reports of Condition and Income which are known as call reports. Within these call reports are totals of agricultural loans and the status (on time or late) of the loans. Figure 1 displays the total loan volume (yellow line) and total loan volume for all three late type volumes (30-89 days late, 90+ days late, non-Accrual) for the last nine quarters. The totals are for all the Southern Ag Today States. 

            Through the first quarter of 2023, non-accrual (blue line) loans continued to decrease, which is positive, and loans that are 90+ days late (grey line) remained relatively the same. Total loans (yellow line) are down from the previous quarter, which is expected due to seasonality trends. But total loan debt is up 4.8% compared to a year ago, which could be due to the effects of input price increases in 2022. The most concerning statistic is the loans that are 30-89 days late (orange line). Debt that is 30-89 days late is up 5.2% from a year ago, and the highest since Q1 of 2021.  Q1 is seasonally the highest quarter for 30-89 days late loans, but given that it’s up from a year ago, this loan type will provide an indication of debt health moving forward in the next round of call reports that come in a few months. 

            From a sky high view, the call reports indicate that there are some possible caution signals for debt in the SAT states. However, total non-current debt is approximately 1%, which is still relatively low. The next two quarters will provide answers if the signals are false alarms or true signals of concern. In the coming months, it is crucial that producers are mindful of their working capital and continue the positive production and risk management strategies they have implemented thus far. 

Figure 1. Non-Real Estate Farm Debt from 2021 Q1- 2023 Q1

References

Martinez, Charley, and Haylee Ferguson. “Current Non-Real Estate Farm Debt“. Southern Ag Today 2(30.3). July 20, 2022. Permalink

---

Martinez, Charley. “Current Non-Real Estate Farm Debt.” Southern Ag Today 3(23.3). June 7, 2023. Permalink

No… not crop yields, we are talking about bond yields and rising interest rates.  As the Federal Reserve began battling inflation a little more than a year ago with interest rate hikes, Dr. Anderson and I discussed the progression of inflation, interest rates, and the nature of yield curves in a series of articles here on Southern Ag Today.   Over the course of the last 14 months, the Fed has incrementally pushed the Federal Discount Rate to 5.25% as of late May 2023, up from 0.25% in March 2022.  

In “Careful on the Curves” from July 13, 2022, we described yield curves for Treasury bills/notes.  Without repeating too much of that discussion, the yield curve is simply the structure of market interest rates or yields for instruments (treasury bills or corporate bonds) with varying maturity dates.  The shape of the yield curve can reveal a sense of what the market expects with regard to inflation and future economic conditions.  

Typically, yields increase as the maturity length of a financial instrument increases creating an upward sloping yield curve.  This fairly normal yield relationship reflects the expectation that investors require a higher yield to commit to longer-maturing investments but also suggests relative stability in other factors, such as inflation, economic growth, and market volatility.

Figure 1 shows the progression of the yield curve at the end of each quarter from September 2021 through May 2023.  In today’s market, we find the unusual (up-side-down) inverted yield curve where long-term yields are below short-term yields.  By September 2022, the curve between 3Yr and 10Yr maturities was inverted.  In December 2022, the inversion progressed to cover 6Mo to 10Yr maturities.  In the first quarter of 2023, longer-term rates declined relative to Q3 & Q4 of 2022.  Combined with continued upward pressure from the Fed on short-term rates, today we see the strongest downward sloping curve spanning 1Mo to 10Yr maturities.

There is a well-known quip that economists have predicted 10 of the last 5 recessions.  That line is particularly apt in a discussion of the yield curve.  An inverted yield curve has frequently been a precursor to recession – that’s why people take notice when it happens.  Unfortunately, there is no such thing as a sure thing when it comes to economic indicators; which is too bad because that would make economic forecasting a whole lot easier.  What the inverted yield curve tells us for certain is that the current economic situation is particularly uncertain.  As we write this, the market is trying to figure out how the government is going to navigate the imminent approach of the debt ceiling limit, whether the Fed will continue on their path of raising interest rates, and what OPEC plans to do with oil production.  And those are just a handful of the big-ticket items in play.  These significant market events will be taking place within – and being influenced by – a domestic and international political situation that is tense, to say the least.  So what is a decision maker to do with the inverted yield curve?  The old adage ‘hope for the best, prepare for the worst, comes to mind.  More concretely, that means preparing for two or three quarters of recession (e.g., by minimizing exposure to short-run interest rate risk and protecting equity).  While a recession is not a foregone conclusion, the probability is too high to prudently ignore.

Figure 1.  Treasury Yield by Maturity: Selected Daily Yields, 2021 to 2023

---

Commercial row crop production faces many risks that may result in actual harvest yields falling below yield expectations. Historical data from the USDA-RMA Cause of Loss indicate excess moisture and drought are the top weather risks faced by producers nationwide. In the mid-south, excess moisture early in the season is a prevalent risk affecting planting decisions (USDA-RMA, 2023). Producers with wet fields may be forced to plant later than anticipated, plant an alternative crop (e.g., soybeans), or forego planting altogether. If a producer is forced to forego planting altogether, not only will the producer experience the loss in revenue expected from harvesting the crop, but they also bear the cost associated with land preparation prior to the prevented planting. The prevented planting provision of federal crop insurance helps producers to reduce the financial uncertainty of navigating early season planting risks. 

The prevented planting provision is unlike other crop insurance provisions since indemnities paid to producers are not intended to cover yield losses, but rather the sunk cost required to have land prepared for planting and, to a certain extent, the cost of invested capital needed for crop production. An insured producer is eligible to make a prevented planting claim if they are unable to plant a crop before the final planting date^[1], which varies across counties and crops (USDA-RMA, 2021a). A producer will receive 100% of the prevented planting indemnity on the first insured crop if a second crop is not planted or if a cover crop is planted but not harvested for grain or seed. A producer may also receive the full prevented planting indemnity if the subsequent cover crop is grazed, cut for silage, hayed, or baled (USDA-RMA, 2021b).

Importantly, the prevented planting indemnity itself does not affect a producer’s Actual Production History (APH), the 10-year average of an insured unit’s yields. However, the APH will be adversely impacted if a second crop is planted, grown, and harvested following the prevented planting claim of a first insured crop. If the producer decides to plant a second crop after the late planting period^[2] of the first crop, the prevented planting indemnity is reduced to 35% of the full prevented planting payment, and the producer receives a yield of 60% of APH of the first crop to be included in future APH calculations (USDA-RMA, 2021a). Using long grain rice as an example, Figure 1 demonstrates how planting a second crop following a prevented planting claim can affect a producer’s APH over time. 

Beginning with the Jackson County, AR, 2023 average APH for rice of 70.33 cwt/acre, Figure 1 shows that if insured rice is prevented from planting and a second crop for harvest is planted, the unit’s APH will be reduced by 4%. Figure 1 further shows that consecutive years of planting a second crop following prevented planting can have a compounding effect. If a producer planted a second crop in 2 of the previous crop years considered in the APH calculation, the producer’s 2023 APH is reduced by 8%. After planting a second crop in 4 of the historical crop years used in the APH calculation, the reduction in the 2023 APH will be as much as 16%. If this choice was made in 10 consecutive historical years, the unit’s APH would be reduced to nearly half its original value. In addition to losing insurable yield levels, a declining APH will impact insurance premium rates.  Special provisions exist for counties with approved double crop practices, and in certain cases multiple year prevented planting claims may be limited.  Always confirm your choice options and consequences with your crop insurance agent.

Figure 1: Percent loss in APH rice yields after planting a second crop following prevented planting

---

^[1] For maps giving the breakdown of final planting dates by county and crop across the U.S., visit https://www.arcroprisk.com/data/crop-insuranceand look under “Final Planting Dates by Crop.”

^[2] The late planting period is generally 25 days after the final planting date of a given crop (USDA-RMA, 2021c).

---

References:

USDA-RMA (2021a, July). First and Second Crop Rules. Risk Management Agency Fact Sheet. Washington National Office, Washington DC.

URL: https://www.rma.usda.gov/en/Fact-Sheets/National-Fact-Sheets/First-and-Second-Crop-Rules.

USDA-RMA (2021b, July). Managers Bulletin: MGR-21-004. 

URL: https://www.rma.usda.gov/en/Policy-and-Procedure/Bulletins-and-Memos/2021/MGR-21-004.

USDA-RMA (2021c, July). USDA Risk Management Agency Fact Sheet. Prevented Planting Insurance Provisions Flood. 

URL: https://www.rma.usda.gov/en/Fact-Sheets/National-Fact-Sheets/Prevented-Planting-Insurance-Provisions-Flood.

USDA-RMA (2023, May). USDA Risk Management Agency Cause of Loss Historical Data Files. 

URL: https://legacy.rma.usda.gov/data/cause.html.

---

Biram, Hunter, and Lawson Conner. “Prevented Planting and APH Reductions After Planting a Second Crop.” Southern Ag Today 3(21.3). May 24, 2023. Permalink

Photo by Tim Mossholder: https://www.pexels.com/photo/photo-of-green-field-near-mountains-974314/

Foreign land ownership has recently become a hot topic for politicians and the news media in the United States. Reasons given for interest in this topic include rising land values, added barriers for beginning farmers, and concerns about food security and national security due to non-U.S. ownership of agricultural assets. There is currently no federal law that prohibits the ownership of private agricultural land by foreign persons or entities. The federal government’s only involvement is the monitoring of land acquisitions and recording of information on those purchases through the passage of the Agricultural Foreign Investment Disclosure Act of 1978 (AFIDA).  Under AFIDA, qualifying foreign entities who buy or sell an interest in agricultural land are required to report the transaction within 90 days of the date of transition. Failure to comply with the AFIDA results in a civil penalty of up to 25% of the fair market value of the interest held in the land (USDA-FSA 2021). 

Under AFIDA, the term agricultural land includes cropland, pasture, and timber. Foreign holdings of U.S. agricultural land increased by 2.4 million acres in 2020 (USDA-FSA 2021). However, these holdings represent a relatively small proportion of the overall base of farm and timber land in the United States. The total amount of U.S. cropland, pasture, and forest land under foreign ownership in 2020 was 37.6 million acres, which represents about 2.9% of all agricultural land. It is also important to note that more than half of US farmland held by foreign countries are long-term leases, often by energy companies, as opposed to outright ownership.

The largest purchaser of U.S. agricultural land is Canada, representing 32% of land owned by all foreign buyers, or 12.4 million acres held. The next four countries holding U.S. agricultural collectively purchased 12 million acres or 31% of foreign-owned land. Those countries are the Netherlands (13%), Italy (7%), the United Kingdom (6%), and Germany (5%). In contrast, China owned 352,140 acres as of the end of 2020, which is less than 1% of foreign-held acres in the United States. As shown in Figure 1, China ranks 18^th overall in U.S. land holdings among foreign countries and ranks 11^th if we focus on U.S. farmland acquired between 2010 and 2020.

The USDA does not have the authority to intervene in private land deals, but individual states can and have passed legislation that affects who can buy agricultural land and how much they can own. In the past two years, many states have proposed legislation limiting foreign ownership of farmland and sometimes all real property. Those bills have varied in detail affecting scope of limitations, countries affected, and differentiating between individuals and corporations. Similarly, at the federal level there were several proposed measures introduced seeking to control, prohibit, restrict, or increase oversight on foreign investments in the U.S. agricultural sector.  As this issue continues to evolve in legislative spheres, it is important to stay abreast of the details of proposed state and federal legislation.

Figure 1. Top 25 Foreign Countries by U.S. Farmland Ownership in 2020

Reference:

Foreign Holdings of U.S. Agricultural Land through December 31, 2020, by the Farm Service Agency and the Farm Production and Conservation Business Center, U.S. Department of Agriculture. Available at http://www.fsa.usda.gov/programs-and-services/economic-and-policy-analysis/afida/index

---

Taylor, Mykel. “Foreign Investment in Agricultural Land.” Southern Ag Today 3(20.3). May 17, 2023. Permalink

The overall farm financial health remained resilient and strong in the past few quarters. The agricultural loan default rates for both production and farmland loans have decreased in 2022. Observation from the Farm Credit Administration (FCA) also shows that the percentage of nonperforming loans is at 0.47%, a very low number compared to previous years. The total number of farm bankruptcy cases (Chapter 12 bankruptcies) was 169 in 2022, the lowest number since 2004. However, the outlook appears less positive.

We just began the first quarter of 2023 with great uncertainty. On April 28^th, it was reported that the GDP growth rate in the U.S. slowed considerably. The annualized rate of growth was only 1.1%, half of what was forecasted. March inflation rate was higher than the expectation and reached 4.2%. There are signs of recession, including the yield curve inversion observed in the U.S. treasury. There have been massive layoffs in the tech sector, reduced corporate investments, and major bank failures on the West and the East coasts. 

The agricultural sector is expected to be affected by these uncertainties. USDA’s forecast made earlier this year shows net farm income is predicted to drop significantly in 2023, by more than 13%. If we do enter a recession and consumers tighten their budgets, there is a possibility that the impact will be even more severe and extend beyond 2023.

What can we do in the face of all these economic uncertainties? If the farm business is expected to be under financial stress in the worst-case scenarios, taking certain actions can lessen the impact. These actions fall into three strategies to improve the financial situation of the farm business.

Managing Cash Flow

Control costs. Reducing costs is an ongoing challenge for agricultural producers. Evaluate all procedures and purchases and seek ways to improve cost efficiency. 

Reduce or postpone capital purchases and family withdrawals. Critically evaluate purchases and consider repairing for another year rather than replacing.

Other income sources. Consider ways to leverage any excess capital and labor. For example, do you have the equipment/labor/time to provide custom work for other producers?  

Marketing.  Sharpen your marketing plan, and be ready to act on opportunities to lock in profitable prices. 

Renegotiate leases. Approach the landlord with a proposal to reduce the lease payment or shift from a cash lease to a shared lease agreement.

Managing Liabilities

Renegotiate loan terms. Extending loan terms will ease cash flow pressures by lowering loan payments. Refinancing carryover debt or paying interest only for a short term could be negotiated. 

Reduce debt. Reducing debt will certainly relieve some financial stress, but be careful about sacrificing valuable working capital. Although not easy to find, outside equity investment may be a viable source of capital and/or debt reduction.

Refinance. Carefully weigh the advantages of extended loan terms vs. today’s higher interest rates.  Refinancing may not save as much as expected.  If the broader economy moves into recession, watch for declining interest rates and future refinancing opportunities.

Managing Assets

Liquidate cash and investments. If the farm business has maintained a financial reserve of cash or investments, this may be the time to use it to reduce or avoid debt.

Sell inventory and capital assets. If the farm business is holding inventory and waiting for higher prices, consider selling that inventory to reduce debt. If you can do it without affecting operations, selling land or equipment that is seldom used may be a good strategy to generate funds.

---

Kim, Kevin, and Brian E. Mills. “Economic Uncertainty and Ways to Prepare for the Worst.” Southern Ag Today 3(19.3). May 10, 2023. Permalink

Photo by Mikhail Nilov: https://www.pexels.com/photo/a-person-typing-on-laptop-7731373/