Rabo AgriFinance Expects End to Record Farm Income in 2012
Tuesday, February 21st, 2012
While 2012 ag outlook appears very strong according to Rabo AgriFinance Chief Credit Officer Curt Hudnutt, it is unlikely to be another year of record farm income. Production costs are trending higher, which will put pressure on farm income in 2012.
"We're projecting breakeven for corn at $4.30 to $4.90 per bushel and with current commodity prices, there is only about a $1 per bushel margin in that," Hudnutt said.
In 2012 farmers may have to deal not only with rising production costs but also with less support from U.S. taxpayers with the expiration of the Farm Bill in September. The outlook for a new farm bill is uncertain in an election year and with the partisan divisions in Congress.
Markets and prices are expected to remain volatile in 2012, according to Hudnutt. According to Agri-Pulse, more than 95 percent of U.S. agriculture's customers are located outside of the continental United States. As a result, global issues such as European sovereign debt, adverse weather in Eastern Europe, political instability in Africa and the Middle East and political and economic issues in China can directly affect U.S. growers.
Compressed margins for farm lenders
As opposed to the tight credit environment in housing and certain business markets, credit in the agricultural market is relatively abundant. According to Hudnutt, multiple years of record farm income have attracted more banks to agricultural lending.
"Banks have the deposits so they need to find a home for those funds and agriculture has set records for farm income in 2009, 2010 and again in 2011," Hudnutt said. "We're seeing increasing competition from lenders who have not participated in agricultural lending in the past."
Rabobank was the third largest farm bank lender by dollar volume in 2010, according to the latest data available from the American Bankers Association. Wells Fargo Bank and Bank of the West are number one and two in the ABA ranking, respectively.
In its 2010 Annual Farm Bank Performance Review, the ABA finds that U.S. banks are an important supplier of credit to agriculture, providing more than 50 percent of all farm loans. At year-end 2010, 51 percent of the farm loans were to finance farm real estate.
According to Hudnutt, increasing competition among farm banks has led to compressed margins and in some cases lower credit standards at banks that have less experience in agricultural lending. Refinancings were high in 2011 given the low interest-rate environment, although the pace slowed in the third and fourth quarter.
"There are some indications that the cycle might be turning, which could mean problems may develop in 2013 or 2014 on questionable loans," Hudnutt said.
"Rabo has more than 100 years of experience in agriculture so we have not changed our underwriting standards despite the increase in competition. We're focused on growing our customer base by offering a full package of agricultural products and services and building strong relationships with growers."
The value of experience
Hudnutt believes experienced lenders can have a positive impact on a grower's operations, adding to the "circle of influence" that can help drive success. Other farmers, suppliers, lenders and county agents are among those who can help growers improve their operations and results over the long term.
"Growers need specialized knowledge as it relates to their sector or region. We have relationship managers throughout the U.S. that have that knowledge and we are looking to grow our agricultural business significantly," Hudnutt said.
Rabo AgriFinance is headquartered in St. Louis, Mo. and has hundreds of employees across the U.S. Its central Food & Ag research group provides in-depth analysis of the topics and developments impacting U.S. agriculture. More information on Rabo AgriFinance and Rabobank is available at www.raboag.com.