Financial woes hit livestock, ethanol producers

Nov 6, 2009
by DTN
Financial woes hit livestock, ethanol producers

Deterioration in the credit quality of ethanol and livestock producers is prompting a flurry of debt restructuring and higher loan losses at the Farm Credit System and other ag lenders.

In a report issued last week, the Farm Credit System’s Funding Corporation said that it had set aside $733 million to cover anticipated loan losses for the nine-month period ending Sept. 30, up from $124 million a year earlier. Most of its problem loans are concentrated in ethanol, dairy and swine, although other specialties like forestry had also been hurt by the housing recession.

Overall, 95 percent of the system’s $160 billion loan portfolio is rated as acceptable, a level that regulators at the Farm Credit Administration consider good.

“We’re not shocked. We’ve been saying all along that credit conditions would deteriorate by year end,” said the Farm Credit Administration’s chief economist, John Moore, who notes that problem loans are still running below levels of the early 1990s.

Still, non-accrual loans— ones with potential for loss—have nearly doubled to $4.1 billion since Dec. 31, the Funding Corporation reported. More than half of those high-risk accounts—58 percent—remain current on their principal and interest, as compared to 75 percent at yearend 2008. The issue is that much of the lifetime equity of livestock producers has eroded in recent months, worsening their credit status even when they are current with their loan payments.

Steep devaluations in confinement buildings prompted lenders to secure increased collateral from producers over the past few months, said Texas A&M economist Danny Klinefelter. “When there was an industry-wide downturn, lenders found that confinement facilities were worth almost nothing in this market.”

One independent Midwest pork producer who had a co-op sow unit was required to inject more capital into the unit this summer “even though the notes were all performing on schedule and several paid ahead a considerable amount. We didn’t like it very well and wondered why they were pushing so hard on it at a time when they had to have many others who were not performing,” said the pork producer, who did not wished to be named.

Commercial banks do not specify what kinds of farm loans are most problematic, but “our latest banker surveys show farm loan repayment rates are down and more than half of the ag bankers are doing more renewals and extensions,” said Kansas City Federal Reserve’s agricultural economist, Jason Henderson.

“Anecdotally, we’re hearing that their biggest concern is the livestock sector. Cattle feeders have improved their margins this year, but hogs and dairy are struggling to break even. They’re living off their equity at this stage.”

Henderson says many farm bankers are negotiating workouts with livestock producers, such as debt rollovers if operators have adequate collateral. Those who can’t project cashflows even when margins recover may face liquidation. At the moment, however, forecasts are for dairy and pork profitability to improve by 2010.

“Clearly, dairy and hogs are in as serious a situation as at any time in my career,” said Donnie Winters, CEO of the Louisville-based Farm Credit Services of Mid-America, the nation’s largest farm credit association. “Lenders as a group— not just us—are starting to work through this situation, but the industry hasn’t figured out the best solution going forward.” — DTN