Agricultural Credit Market Update Todd H. Kuethe - - PowerPoint PPT Presentation

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Agricultural Credit Market Update Todd H. Kuethe - - PowerPoint PPT Presentation

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Agricultural Credit Market Update Todd H. Kuethe www.farmdocdaily.illinois.edu www.farmdoc.illinois.edu Agricultural Credit Market Update Tight margins and exhausted working capital reserves Farms may wish to use debt capital to meet

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Agricultural Credit Market Update

Todd H. Kuethe

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Agricultural Credit Market Update

  • Tight margins and exhausted

working capital reserves

  • Farms may wish to use debt capital

to meet short-term liquidity needs

  • Farmers likely to face increased

scrutiny

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Total farm debt has been increasing, slowly

50 100 150 200 250 300 350 400 $Bil (nominal)

Non Real Estate Real Estate

Source: USDA-ERS

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Debt relative to income has been increasing, quickly (liquidity risk)

1 2 3 4 5 6

Debt/Net Farm Income

Source: USDA-ERS

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Solvency position still strong, but signs of increasing risk

11.4 11.7 12.3 12.4 10.0 11.0 12.0 13.0 14.0 15.0 16.0

Debt/Asset Ratio

Source: USDA-ERS

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After long period of decline, delinquencies are rising (slightly)

Non-Real Estate Real Estate

0.5 1 1.5 2 2.5 3 3.5 4 4.5 2008 2009 2010 2011 2012 2013 2014 2015 2016

Non-accuring 90 days 30 - 89 days Source: Ag Finance Databook

0.5 1 1.5 2 2.5 3 3.5 4 4.5 2008 2009 2010 2011 2012 2013 2014 2015 2016 % Outstanding Loans

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Farm loan risk ratings are increasing (slightly)

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

2008 2009 2010 2011 2012 2013 2014 2015 2016 Share of Risk Rated Loans ($)

Minimal Low Moderate Acceptable Special

Source: Ag Finance Databook

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Credit risk migration for Illinois grain farms

Source: FBFM 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Class 1 Class 2 Class 3 Class 4 Class 5

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Credit risk migration for Illinois grain farms

Probability of Next Credit Class Credit Class Mean Sojourn Times 1 2 3 4 5 1 7.66

  • 78.4

18.3 2.9 0.4 2 2.86 53.3

  • 37.0

7.0 2.6 3 3.08 13.1 63.2

  • 14.4

9.2 4 1.53 6.3 34.5 51.1

  • 8.0

5 1.64 2.1 21.3 63.0 13.5

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Federal Reserve Districts

  • Quarterly surveys
  • f agricultural

bankers

– Interest rates – Credit market conditions (subjective)

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Quarter 3 Interest Rates

Chicago

  • St. Louis

5.21 4.86 4.94 4.68 4.89 4.62 4.82 4.58 4.87 4.57

Operating Real Estate 2012 2013 2014 2015 2016

5.7 5.5 5.5 5.3 5.2 5.1 5.5 5.2 5.6 5.4

Operating Real Estate

Source: Chicago Fed,

  • St. Louis Fed
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Credit conditions deteriorating

  • 80
  • 60
  • 40
  • 20

20 40 60 80 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Loan Demand

Source: Chicago Fed

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Credit conditions deteriorating

  • 80
  • 60
  • 40
  • 20

20 40 60 80 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Loan Demand Loan Repayment

Source: Chicago Fed

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Credit conditions deteriorating

  • 80
  • 60
  • 40
  • 20

20 40 60 80 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Loan Demand Loan Repayment Renewals and Extensions

Source: Chicago Fed

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Credit conditions deteriorating

  • 60
  • 40
  • 20

20 40 60 2012Q2 2012Q4 2013Q2 2013Q4 2014Q2 2014Q4 2015Q2 2015Q4 2016Q2 Loan Demand Loan Repayment Renewals and Extensions

Source: St. Louis Fed, Ag Finance Databook

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FOMC’s Target Rate

Source: FOMC

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The Fed’s Dual Mandate

  • "The Board of Governors of the Federal Reserve System

and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates.“ – Federal Reserve Act, 1977

  • In English:

– Keep inflation low (about 2%) – Keep employment near full potential (unemployment 4.5 – 5%).

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The Fed’s Dual Mandate

  • 2.0
  • 1.0

0.0 1.0 2.0 3.0 4.0 5.0

Inflation

PCE 0.0 2.0 4.0 6.0 8.0 10.0 12.0

Unemployment

Unemployment

Source: FRED

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The Fed’s Dual Mandate

  • 2.0
  • 1.0

0.0 1.0 2.0 3.0 4.0 5.0

Inflation

PCE Target 0.0 2.0 4.0 6.0 8.0 10.0 12.0

Unemployment

Unemployment Target

Source: FRED

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2009 2010 2011 2012 2013 2014 2015 Now Target

  • 1.0

0.0 1.0 2.0 3.0 4.0 5.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0 11.0

Inflation Unemployment

The Fed’s Dual Mandate

  • 2.0
  • 1.0

0.0 1.0 2.0 3.0 4.0 5.0

Inflation

PCE Target 0.0 2.0 4.0 6.0 8.0 10.0 12.0

Unemployment

Unemployment Target

Source: FRED

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Why many are arguing for an immediate rate increase

19.08

8.15 5.31 4.24 0.40

9.20 6.12 2.09 0.21

Jan 81 - Nov 82 Jul 90 - Mar 91 Mar 01 - Nov 01 Dec 07 - Jun 09 October 2016

Effective Federal Funds Rate Business Cycle Peak and Trough

Source: FRED, NBER

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Federal Funds Rate and the Cost of Agricultural Borrowing

Operating Loans Farm Real Estate

0.0 5.0 10.0 15.0 20.0 0.0 5.0 10.0 15.0 20.0

Farm Operating Loan Rate Effective Federal Funds Rate

0.0 5.0 10.0 15.0 20.0 0.0 5.0 10.0 15.0 20.0

Farm Real Estate Loan Rate Effective Federal Funds Rate

Source: FRED, Chicago Fed

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Summary

  • Farmers should practice caution in

acquiring new lines of credit

  • Borrowers likely to face increase

scrutiny

  • Interest rate increases are likely