Current Agricultural Economy and Farm Bank Conditions

Transcription

1 Current Agricultural Economy and Farm Bank Conditions Division of Insurance and Research Kansas City Regional Operations Branch December 15, 2016

2 Disclaimer The views expressed herein are those of the author and presenter and do not necessarily reflect official positions of the Federal Deposit Insurance Corporation. Some of the information used was obtained from publicly available sources that are considered reliable. However, the use of this information does not constitute an endorsement of its accuracy by the Federal Deposit Insurance Corporation. 2

3 Primary Takeaways Coming off a decade of high returns, the U.S. agricultural sector has been weak since 2014, and conditions are expected to remain that way for the next few years. Farm bank asset quality is starting to weaken from historically strong levels, but the transmission mechanism can be slow. Persistently weak agricultural conditions may result in problems for some farm banks, but a repeat of the agricultural crisis of the 1980s is unlikely. 3

4 FARM INCOME 4

5 Steep Decline in Farm Income Follows Most Prosperous Period Since 1970s Dollars (Billions) Source: USDA (Haver Analytics). Note: South Dakota net farm income, inflation-adjusted values. 5

6 Commodity Prices Tumble But Expenses Remain Stubbornly High Index (2011=100) Crop cash receipts Manufactured Inputs and Seed Farm Property Taxes and Fees Payments to Stakeholders Excluding Interest Expense Source: USDA (Haver Analytics), South Dakota data. 6

7 COMMODITY FUNDAMENTALS 7

8 Crop Fundamentals Snapshot Corn Soybeans Wheat Supply-Demand S > D Generally Long-term Equilibrium 3 of 4 Ys Equal Glut. Stocks-to-Use Decade U.S. Decades High High High. Growth 30% Trend High-side. Other China South Am. Policy Growth 8

9 Potential Shift in Supply-Demand Dynamic Sends Feeder Cattle Prices Tumbling All Cattle (Million) Beef Cows (Million) Source: USDA (Haver Analytics). Steers and Heifers Price Dollars (Per Hundred Weight) Nov Nov Nov Nov Source: USDA (Haver Analytics). Note: Monthly prices received by farmers. 9

10 FARM REAL ESTATE 10

11 South Dakota Led All States in Farm Real Estate Appreciation Multiples of Farm Real Estate Values: 2004 to 2016 Less than to to 2.5 Greater than 2.5 Source: USDA (Haver Analytics). Note: Inflation adjusted values, 2016 dollars. 11

12 South Dakota Cropland Values Have Declined Nearly 10 Percent Nonirrigated Cropland Rangeland (native) Pasture (tame, improved) Dollars Per Acre Hayland Annual % change 16/ % 2.90% -6.40% -2.60% Average value, ,094 1,222 1,704 2,469 Average value, ,265 1,187 1,820 2,535 Average value, , ,603 2,458 Average value, , ,542 2,285 Average value, , ,218 1,758 Average value, , ,011 1,377 Average value, , ,195 Average value, , ,142 Average value, , ,079 Average value, , Average value, , Source: 2016 South Dakota Farm Real Estate Market Survey, SDSU. 12

13 Cash Rents on Cropland Declined Dollars Per Acre Again in 2016 Nonirrigated Cropland Pasture/ Rangeland Hayland Average 2016 rate Average 2015 rate Average 2014 rate Average 2013 rate Average 2012 rate Average 2011 rate Average 2010 rate Average 2009 rate Average 2008 rate Average 2007 rate Average 2006 rate Source: 2016 South Dakota Farm Real Estate Market Survey, SDSU. 13

14 EXPORTS 14

15 Exports Are an Important Piece of Demand for U.S. Crops Corn Exports Percent of Production 35 Soybean Exports Percent of Production 60 Wheat Exports Percent of Production Source: USDA (Haver Analytics). Note: U.S. corn Source: USDA (Haver Analytics). Note: U.S. soybeans Source: USDA (Haver Analytics). Note: U.S. wheat. 15

16 Exchange Rates: Asian Trade Markets Foreign Currency to U.S. Dollar Exchange Rates Index (2012=100) 180 Thailand Taiwan 160 S. Korea Singapore 140 Malaysia Japan China Jan-2010 Jan-2011 Jan-2012 Jan-2013 Jan-2014 Jan-2015 Jan-2016 Source: Federal Reserve Board (Haver Analytics). 16

17 Exchange Rates: U.S. Ag Trade Competitors Foreign Currency to U.S. Dollar Exchange Rates Index (2012=100) Venezuela S. Africa India Euro 250 Canada Brazil 200 Austrailia Argentina Jan-2010 Jan-2011 Jan-2012 Jan-2013 Jan-2014 Jan-2015 Jan-2016 Source: Federal Reserve Board (Haver Analytics). 17

18 AGRICULTURAL BORROWER AND FARM BANK CONDITIONS 18

19 Risk appears manageable at this point several mitigating factors temper the immediate threat of losses in the sector. Agricultural borrower strength and support Farm bank conditions Conservative underwriting 19

20 Unlike recent years, profitability will depend on farmers' ability to operate efficiently, market strategically, and manage their debt. Iowa Corn: Average Price and Production Costs Dollars per bushel Price Land Cost Production Cost Sources: Iowa State University, USDA. 20

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25 Farm Credit Delinquencies Have Inched Up From Historically Low Levels Share of South Dakota Farm Banks Reporting Past-Due and Nonaccrual Agricultural Loans Percent Noncurrent Noncurrent and/or Days Past- Due Source:, 3Q data. Past-Due and Nonaccrual Agricultural Loans Percent (Median) Adjusted Past-Due & Nonaccrual Ag Loan Ratio Past-Due & Nonaccrual Ag Loan Ratio Source:, 3Q data. 25

26 Poorer Profit Margins Have Brought Farmers Back to Borrowing Percent Median LTA Ratio (Left) Median Ag Concentration Ratio (Right) Percent Source:, South Dakota farm banks, 3Q data. Peak Net Farm Income Years

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28 TODAY VERSUS 1980 S 28

29 When the agricultural economy inevitably turns downward, there are two things we keep in mind. The lag between economic effects and banking impacts can be long. If a farmland bubble were to exist, it would magnify the adverse banking results. 29

30 Bubble conditions were evident leading up to the 1980s agricultural crisis, and led to large losses at farm banks. Indexed Value (1972=100) Net Farm Income (Left Axis) Average Value of U.S. Farm Real Estate (Left Axis) Median Net Charge-Off Rate of Total Loans at Farm Banks (Right Axis) Note: There were 297 farm bank failures between The peak years were Percent Source:, 4Q farm banks; USDA (Haver Analytics). Note: Farm real estate values and net farm incomes are inflation-adjusted

31 Today, farmland values appear to be more closely aligned with agricultural fundamentals. Indexed Value (1995=100) Net Farm Income (Left Axis) Average Value of U.S. Farm Real Estate (Left Axis) Est. based on state surveys Percent Median Net Charge-Off Rate of Total Loans at Farm Banks (Right Axis) USDA Forecast Source:, 4Q farm banks; USDA (Haver Analytics). Note: Farm real estate values and net farm incomes are inflation-adjusted. 31

32 RURAL NONFARM ECONOMY 32

33 Source: Ag Credit Survey, Federal Reserve Bank of Kansas City, Financial Stress in the Farm Sector Shows 33 Slow but Steady Increase, November 10, 2016.

34 Rural Mainstreet Index Contraction 15 Consecutive Months Rural Mainstreet Index >50 = Expansion Dec 6-Dec 7-Dec 8-Dec 9-Dec 10-Dec 11-Dec 12-Dec 13-Dec 14-Dec 15-Dec Source: Creighton University College of Business (Haver Analytics). Note: Monthly survey data. 34

35 The Agricultural Slowdown Has Begun to Affect Nonfarm Employment Rural Mainstreet Index >50 = Expansion Hiring Retail Business Confidence Next 6 Months 5-Dec 6-Dec 7-Dec 8-Dec 9-Dec 10-Dec 11-Dec 12-Dec 13-Dec 14-Dec 15-Dec Source: Creighton University College of Business (Haver Analytics). Note: Monthly survey data. 35

36 Several potential destabilizers could quickly inflate agricultural risk. Rapid appreciation in the dollar Sharp increase in interest rates Chinese or Asian economic slump Repeal of renewable fuels standards 36

37 PRESENTER CONTACT INFORMATION Division of Insurance and Research Kansas City Region Rich Cofer, Regional Manager