Producers in the central United States are being buoyed by a recent uptick in commodity prices and a swell of government payments, the Federal Reserve Bank of Kansas City noted in a quarterly report Thursday, but some bankers are worried the better conditions could be sending false signals.
Those two factors are among the leading reasons the Kansas City Fed suggests credit conditions in the region improved after “dropping sharply in the second quarter due to disruptions associated with the COVID-19 pandemic.”
“Strengthening demand supported additional increases in crops prices through the third quarter and into October, expanding profit opportunities for many producers heading into harvest,” Nathan Kauffman, Omaha branch executive and Kansas City Fed vice president, and Ty Kreitman, Kansas City Fed Assistant Economist, wrote in the report.
“As a result, credit conditions deteriorated at a notably slower pace and the share of bankers reporting declines in farm income and loan repayment rates dropped from the previous quarter,” they added.
Specifically, the report says about 55% of ag bankers in the district — which stretches from Missouri up to Wyoming and down to New Mexico — reported lower incomes than a year ago, a drop from 75% reporting a drop in the second quarter. Kauffman and Kreitman also noted softer farm loan demand; about 25% of bankers said loan demand was lower than a year ago. That’s the highest percentage of bankers reporting lower loan demand since 2013.
However, some bankers surveyed said the current structure of the farm economy — which includes a healthy dose of direct payments from the government — is not sustainable.
“Government payments are keeping the ag economy propped up,” one southwest Kansas banker said. “If program payments are lowered greatly it will have a negative effect on the ag economy. It's giving a false sense of security.”
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Direct payments under the Trump administration have grown considerably, nearly tripling since 2018 when the Market Facilitation Program was created. MFP would go on to provide about $28 billion in funds to producers hit by the trade war and its retaliatory tariffs. This year, the Coronavirus Food Assistance Program has funneled billions in payments to farm country, including more than $9.5 billion in the program's second iteration.
Others pointed to drought in the region as a cause for concern. But broadly speaking, the banker comments reported by the Kansas City Fed reflect an improved financial standing — with some room for further improvement — for producers in the region.
“Government programs related to COVID have been effective in providing producers liquidity to weather the market disruptions,” a south central Nebraska banker noted. “We don't expect an overall profitable year for all operators, but hopefully working capital burn will be minimal.”
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