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FEATURE


While large harvests improve the cash flow of agricultural producers in the short term, they can hurt profitability going forward because of the downward effect on prices. In turn, years of sluggish profits have forced more farmers to take out loans to finance their operations.


2017-2018 crop year. If realized, this would be the highest corn yield on record in the United States. Meanwhile, concerns about an ongoing trade war with China,


which imposed a 25 percent retaliatory tariff on U.S. soybeans in response to U.S. tariffs on aluminum and steel, caused soybean prices to plunge close to a 10-year low this summer. China has long been the largest buyer of U.S. soybeans, purchasing close to 31 percent of U.S. production in 2017. China has also increased its tariffs on U.S. pork products from 25 percent to 62 percent. In early October, the United States, Canada and Mexico


reached an agreement to update the North American Free Trade Agreement (NAFTA), now known as .the U.S.-Mexico-Canada Agreement (USMCA). However, for the time being, Mexico’s 20 percent retaliatory tariff on U.S. pork remains in place, as does Canada’s 10 percent retaliatory tariff on U.S. beef. These tariffs lin- ger at a time of near-record U.S. stockpiles of pork, beef and poultry.


Agricultural Lending Impact


While large harvests improve the cash flow of agricultural producers in the short term, they can hurt profitability going forward because of the downward effect on prices. In turn, years of sluggish profits have forced more farmers to take out loans to finance their operations. In the second quarter of 2018, agricultural bankers across the


Midwest reported elevated demand for farm loans, as well as a modest increase in problems with loan repayment, amid reduced agricultural profitability. In late July, the USDA announced it would implement a $12 billion aid package for all farmers and producers who have


CHART 1


Exports from the Midwest region have remained strong despite a recent pullback in soybeans.


Top Midwest Ag Exports


been impacted by retaliatory tariffs. A portion of the funding will be administered by USDA under the Commodity Credit Corp. (CCC) Charter Act. First signed into law in 1933 in the midst of the drought-racked Great Depression, the act authorizes the USDA to borrow up to $30 billion from the Department of the Treasury without congressional approval to “stabilize, support, and protect farm income and prices.” On Aug. 27, the USDA revealed the details for the first tranche


of the package, which allotted $4.7 billion for direct payments to corn, cotton, dairy, hog, sorghum, soybean and wheat producers. The majority of the aid, $3.6 billion, is allotted for soybean producers. If needed, USDA officials said a second tranche will be made available starting in January. In addition, the USDA will purchase up to $1.2 billion in commodities for nutrition assistance programs and will make $200 million available to help exporters identify and develop foreign markets for U.S. agricultural products. While it is still too early to gauge the full extent of the


potential impact of bumper crops and tariffs on U.S. farmers’ balance sheets, the outlook for 2018 shows a further decline in net farm income to $65.7 billion, according to the USDA’s Farm Income Forecast released on Aug. 30. However, farmland values appear to have remained relatively


steady during all of this volatility. Farmland values can comprise more than 80 percent of the total value of farm assets; so, the debt-to-asset ratio, a common measure of solvency, is an important measure (see Chart 2). The farm sector appears to remain relatively well insulated from potential solvency impacts because the debt-to-asset ratio remains relatively low by historical standards.


CHART 2


With lower prices, liquidity has deteriorated, but measures of solvency have remained strong.


U.S. Farm Sector Solvency and Liquidity Metrics


MIB Community BANKING 11


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