This is just the beginning, and so soon after great prices...

[Hobbyfarmer]

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        Credit Begins to Crack

By Elizabeth Williams
DTN Special Correspondent

INDIANOLA, Iowa (DTN) -- The farm financial ice is beginning to crack, reports from financial consultants, machinery dealers and bankruptcy attorneys show.

Andy Goodman, president of the Iowa-Nebraska Equipment Dealers Association, knows two situations beginning in March where the bank asked an equipment dealer to pay up on a lien for a piece of equipment a farmer had traded in. The dealer didn't know it had a lien against it.

"We haven't had these types of calls for years. But beginning in March, we've gotten several calls from worried dealers," Goodman said. What surprised the dealers is the equipment didn't have a specific lien against it. Rather, it was included in a farm "blanket" or "dragnet" clause on a security lien for an operating loan. In those cases, the bank technically owns the equipment the dealer bought from the farmer who later defaulted on his bank loan.

In fact, "my first farm bankruptcy call in a long time came around Christmas, and since March, my farm bankruptcy business has really picked up," said attorney Joe Peiffer, with Day Rettig Peiffer, P.C., in Cedar Rapids, Iowa. "One client who last year farmed over 15,000 acres found out on the Monday before his March 1 cash rent payments were due that his lender would not give him any financing.

"And I just got a call April 30 from a farmer who last year got financing at the last minute, but wasn't able to get any money this year. It's May. He thought he was going to be OK, but now he's calling me [a bankruptcy attorney] for help."

LANDLORDS AREN'T BACKING DOWN

Peiffer also had another client who had a problem with his landlords and sold out this winter. "He had signed a lease for $150,000 last fall, but it was terminated when he didn't pay it. The landowner found another tenant who would only pay $120,000. The owner has asked my client for the $30,000 difference," said Peiffer. "In addition, the landowner has threatened to sue not just for the shortfall in 2015 rent, but also for all of the 2016 and 2017 rent as well. How's he going to pay that when he couldn't even afford this year's lease?"

Moe Russell with Russell Consulting in Panora, Iowa, had four situations where his customers found more land to rent in the third and fourth week in April. "One landowner approached my farmer client because his tenant did not pay the rent that was due April 1. The farmer asked for a lower rent, but the landowner was not willing to budge and said he would put it up for bids if the farmer didn't pay the amount the owner had negotiated with his former tenant last fall." Russell has seen a few landlords go down $10 to $25 per acre in cash rent this year, but not much more than that.

"The past five to 10 years, farmers, for the most part, have had high capital expenses and high living expenses; now they are facing high cost of production. With the current inverted profit margins, something has got to give," explained Russell.

WHERE DO WE GO FROM HERE?

All farmers, even those not financially fragile, should run cash flows this July, recommended Peiffer. There could still be a commodity price run-up after July, but don't count on it. You know what's in the ground, you can estimate your costs for getting it out. And you should have an idea of what price you can get.

"Talk to your banker. Make sure you are on the same page before you go to your landowner in August to set next year's rent," advised Peiffer. (Iowa has a farm tenant termination deadline of Sept. 1.)

One of the segments most exposed to financial shock is large operations over 7,500 acres who have expanded quickly in the past five years, especially those who have a lot of cash-rented acres. "Four out of the past five farmers who have come to me have had debts larger than Chapter 12 [re-organization bankruptcy] eligibility (over $4.37 million)," added Peiffer.

"You need to figure out if you won't make a profit this year, how can you minimize your loss? And how many years of loss can you afford and still get financing from your bank?" said Peiffer.

TIGHTEN YOUR BELT

"A lot of bankers will be evaluating portfolios, looking for working capital," noted Nathan Kauffman, Omaha branch executive with the Kansas City Federal Reserve. "July will be a crucial time to evaluate the crop and expected profits," he added.

Family living expenses will be on the chopping block. "There are a lot of nice pick-up trucks, campers and boats bought on installment," said Peiffer.

It's tough to pare down your living expenses, said Russell. But that may be the only thing you have control over in the near-term.

On the flip side, those in good financial shape with strong working capital can look for opportunities, Russell said. "The bottom line in a free-enterprise society is it's OK to fail, but it's also OK to succeed."

If you have an equipment dealership, make sure you get a release from any liens the customer's lender may have on that piece of equipment. What happens sometimes is the farmer has a purchase money security interest with John Deere or Case IH and the dealer gets a release from that. That is obvious. But then the farmer's lender or even the equipment manufacturer's financial company may also have a second lien on that equipment related to other loans with the lending company, Peiffer explained.

"Before accepting a trade-in or purchasing used equipment, the dealer should call the farmer's lender and get a termination of UCC (Uniform Commercial Code) with respect to that piece of equipment," said Peiffer.

Federal Reserve's Kauffman noted that an increase in loan defaults hasn't shown up in the regulator's data yet. "We took our first-quarter [credit conditions] survey in February. The next one will be in May. Coming off lofty farm incomes and high land values sounds similar to the 1980s, but financial leverage isn't the same today as it was back then and farm households have more off-farm income," Kauffman said in explaining why a financial setback this time may not be as severe as in the 1980s.

However, the financial ice in agriculture is beginning to crack. "The more important question is, 'how thick is the ice?' Peiffer said.

If we can get cash corn back up to $4.50, the stress will drop. The $4.20- to $4.50-per-bushel range covers a lot of farmers' costs, said Russell. "But Friday at my central Iowa co-op, cash corn was $3.64."

That's pretty thin ice 

[rayjenkins]

since you like to keep bringing this up.....

was it more or less than $100 per acre??

[illinifarmer]

Agreed been happening for awhile now here in IL as well. Ask any farmer, lender, or dealer it's crazy. Asking a landlord to drop rent leases is worse than pulling teeth good luck been there. Ray I believe you can pull up county rent avg. it's public information FSA office. Not much around here for less than 200$ locally. Also crazy

[kyu2852570]

I'm surprised with how tight you are that you'd stick your neck out like that. Must be high enough rent that none of the guys buddies or relatives wanted it. I can't believe you are the only one in the area able to pay cash rent up front, being it is common across the entire Midwest.

[Blacksandfarmer]

The pain is being felt in farm country, just not as noticeable as most would think. One of the 10,000 acre BTO's in my area went out a couple months ago, and another to my south is shedding ground like crazy.

[sw363535]

I am not asking that much on the financial issues in the area...... 

But I am noticing that there are planters around that have not started yet, on May 7th..... We would normally be 75% done with corn....and our weather has not been bad at all...

Water depletion, price,  expenses, ------ lots of issues to blame,  but maybe we have reached a point where, in our area, we are not going to waste water on a guatanteed loss investment.  Whatever ...... we are seeing acres changing to lower cost crops.

Trying not to focus on the pain--- like trying not to catch the "bird flu".

[OKdon]

The same fellows that object when competitive bidding drives cash rent to new highs, don't seem to mind when competitive bidding drives corn to $7 and higher. 

After all those landlords need to pay taxes now because they aren't gonna pay anything when they croak.

[OKdon]

It seems simple to me. Accept the terms you agreed top or negotiate new terms. I can't remember ever renting a farm without agreeing to the terms. One should not be expected to reduce the rent if he has better options with other folks. Competition is what drove rents to higher levels and competition may well drive rents lower. Or don't you think supply demand should be a factor?