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Ag not immune to financial crisis

As 2009 closed out to 2010, the American farmer was faring better than other segments of the economy. However, agriculture continues to suffer problems centered around the collapse of credit from commercial lenders afflicted by the subprime contagion.

There’s also much deterioration in farm profitability, especially dairy and livestock. They’re caught in a cost-price squeeze that doesn’t seem to want to end soon.

The financial sector’s subprime recklessness couldn’t have come at a worse time. From the bankers’ point of view, they claim they can’t put their bonuses — capital (sorry) — at risk, so they cannot venture into risky loans.

By all accounts, the market value of farm equity is over 90%, so collateral shouldn’t be an issue. Nonetheless, credit quality of commercial lenders has deteriorated greatly in the past year.

Key Points

• In general, farm equity (collateral) remains strong.

• Nonperforming ag loans, while rising, are still very low.

• Access to credit will recover if investors retain faith in Treasury bills.


Ag financial situ weakening

Between June 2008 and June 2009, nonaccrual commercial bank loans increased four times, from 769 million to 3.077 billion. Nonperforming loans increased 3.8 times, from 884 million to 3.252 billion.

The Farm Credit System also saw weakened performance in nonaccrual and nonperforming loans during 2009. Only one in 200 loans were nonperforming or nonaccrual in 2008. But about two in every 100 were nonperforming in 2009. Total delinquencies are currently about 2.4% for non-real estate loans, and about 2.7% for farm real estate loans.

Farmers still better credit bets

Deterioration in ag loan quality has been minuscule compared to that of consumer credit and nonfarm mortgage loans. Agricultural credit quality, as a whole, is much stronger than consumer credit.

Since 2007, ag loan delinquency rates have been only half of that of consumer mortgages. More critically, ag loan charge-off rates were only 20% of that on consumer loans by late 2009.

Delinquency and charge-off rates on credit cards and nonrevolving loans for auto and improvements in agriculture have always been lower — just 36.6% of consumer delinquency rates. By 2009, such ag-related loans rose to being 60% as likely as a consumer loan to be delinquent.

Charge-off rates in agriculture are also much lower than on consumer loans.

In 1990, a typical farm loan was only 23.8% as likely as a consumer loan to be written off. That’s dropped to only 5% in recent years.

In other words, a consumer loan is nearly 20 times more likely to be charged off by a commercial lender.

So what’s the prognosis for 2010? As long as commercial credit markets stabilize and international and institutional investors retain faith in U.S. Treasury bills, credit access should start recovering.

Turvey is an ag finance specialist at Cornell.


What to expect for ’10 milk prices

The big 2010 question isn’t whether milk prices will be better, but how much better they’ll be. It looks like milk and input prices will align enough to allow average producers to keep current with their bills, and probably catch up with outstanding accounts toward the end of the year.

Many dairy farms, however, are considerably weaker financially than a year ago. Equity losses were so dramatic that it’s less likely that 2010 will provide much catching up. This suggests cow numbers will stay where they are and milk production won’t grow rapidly.

Key Points

• U.S. and global economies still braking milk and dairy demand.

• All-milk blend may average between $17 and $18.15 for 2010.

• Corn still will be a relatively high-priced feed ingredient.


Dunn’s call: Futures prices for the next 12 months for both Class III and Class IV milk are $4.15 above the 2009 average. That puts the Pennsylvania all-milk price equivalent at about $18.15 for 2010.

Butter, nonfat dry milk and dry whey are expected to rise in 2010. The futures market expects cheese prices to rise, too, though some analysts disagree.

Class IV price has strengthened considerably in recent weeks. That’s consistent with the outlook for butter, powder and whey.

One particularly important factor is that U.S. prices are competitive internationally. The dollar is much weaker than in early 2009, especially compared to New Zealand.

With feed prices higher than a few years ago, the same milk prices have lower net income. We calculate a milk margin that reflects the amount remaining from the milk price after feed costs have been paid. If feed prices remain fairly steady in 2010 (which I expect), this milk margin value will be about $12.50 for the year — close to the 2008 average.

Novakovic’s call: Prices are expected to strengthen about $1 per cwt. through year-end. For producers in Federal Order 1, this suggests an average blend price for 2010 of around $17.

With this winter’s price improvements and a new harvest providing barns full of feed, we may see milk production springing back a bit, or at least not declining further. This would keep milk prices from rising more briskly.

Recent surges in dairy commodity prices anticipated a resurgent world export market. But it’s not yet clear that this has happened.

Within the U.S. where 95% of our sales occur, changes in dairy sales have been subtle, but negative. Although there are signs that the economy is improving, recovery in Oak Street homes is more sluggish than for Wall Street corporations.

Consumer confidence, consumer debt, employment and so on have recovered dramatically from their low points, but remain a good distance from the edge of the woods.

High-priced inputs, especially feed and chiefly corn, have been a huge factor in dairy profitability. The futures markets suggest that corn will earn growers about $4 to $4.25 in 2010, with Northeast buying prices likely to run 25 to 75 cents a bushel more.

Other input prices also will show some increases in 2010. But with soybeans, diesel fuel interest rates, these increases are expected to be very modest.

2010 improvements are coming, but may be slow and shallow. With more help from the demand side, milk prices could strengthen far more than presently expected. But it’s unlikely to occur before next fall at the earliest.

Dunn and Novakovic are ag economists at Penn State and Cornell, respectively.


Beef prices to head higher

The worst recession since the early 1930s now has taken a toll on livestock producers, processors, retailers and, of course, consumers. The global recession cut U.S. meat exports.

U.S. consumers are eating “lower on the hog,” as was the case in the 1930s. Some consumers are eating more chicken legs, less breast meat, and even substituting canned dried beans for meat as a protein source.

Beef and poultry output dropped in 2009, while pork was up. Total supply of meat was lower than in 2008, yet prices dropped due to less meat demand. In “normal” times, this drop in supply would have brought higher cattle prices.

The economy is beginning to recover slowly, with estimated 2010 economic growth to be about 2.7%. So, consumers will continue their thrifty ways.

Recovery in the European Union and Asia has been much faster. The weak dollar and economic growth overseas should boost meat exports and help the livestock sector.

Expect a better year for beef

Feed costs and cattle prices will continue to be very volatile. The ethanol industry will use about 4.2 billion bushels of corn in 2010, up from 3.7 billion a year ago. USDA estimates corn prices of about $3.90 a bushel in the marketing year ahead.

At current use rates, there’ll be even less carryover of corn than a year ago. So don’t look for much feed cost relief.

Placements of cattle on feed in recent months have been higher than expected, despite poor profit prospects — up nearly 5% in the fourth quarter over a year ago. It’ll be difficult to keep placing large numbers of cattle into feedlots.

The 2009 calf crop was down, and the weak dollar will attract fewer feeder cattle shipped from Mexico and Canada. Beef exports, however, should increase to about 2 billion pounds in 2010.

With that in mind, it appears that choice steers will average about $90 per cwt. in 2010, up nearly $7 from 2009.

Cow-calf operators can expect 2010 feeder cattle prices to average about $104 per cwt. compared to $97 the past year. The 2010 calf crop should drop from 2009 levels. The heifer proportion of cattle on feed is 38.5%, indicating cow-calf operators aren’t planning to expand.

Total 2010 beef supply is expected to be about 25.5 billion pounds, down about 400 million pounds from a year earlier. Per-capita consumption of beef will be about 60 pounds, down 1.3 pounds from 2009. A slightly better year is expected in 2010.

Moore is an Extension livestock specialist at Penn State.

Tough hog times to persist in 2010

Hog prices have been significantly below breakeven for most months since October 2007. That should have resulted in major herd liquidations. But firms are reluctant to make major cuts.

Recent bankruptcy of a major integrator in North Carolina shows that industry financial problems are growing. Current levels of reduced pork demand don’t support current high production levels.

Improving export markets near year-end brought some improvement in hog prices. Pork exports rebounded to 4.1 billion pounds, up nearly 1 billion over a year earlier. Exports in 2010 will increase to about 4.5 billion pounds as world economies emerge from recession. The weak dollar favors exports over imports.

In 2010, pork production should drop about 600 million pounds — but not enough to return the industry to profitability. Most producers need hog prices to exceed $50 per cwt. to cover all costs.

But watch out for the poultry industry. An increase in broiler production later in the year will provide increased competition for pork.

— Lou Moore

This article published in the February, 2010 edition of AMERICAN AGRICULTURIST.

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