Economist: Some farmers are ‘so illiquid’ that crop insurance doesn’t matter and they will not lend to them
February 19, 2019
SAN DIEGO — In yet another sign of the deteriorating farm economy, a Wells Fargo economist said here last week that banks will not make loans to all financially troubled farmers who have crop insurance this year, even though they will require them to buy it.
"Crop insurance is a good safety blanket for farm loans," Michael Swanson, an agricultural economist for Wells Fargo in Minneapolis said here on Feb. 21 at the Crop Insurance and Reinsurance Bureau annual meeting. He noted that some farmers are now "so illiquid that crop insurance doesn't matter. We simply will not lend to them."
Banks that have made loans to farmers who have not made a profit for three years will be out of compliance with regulators, he said.
Swanson declined to say what percentage of Wells Fargo customers are in trouble, but he told The Hagstrom Report in an interview the biggest issue is with new customers who apply for loans but can't qualify for them.
Some farmers bought land with cash during the good years but now have a shortage of working capital, he said. They are going to lenders and asking to take out mortgages on the land, he noted. That means the land is still listed as an asset but they still owe the money on the mortgages.
"We are going through a renormalization of U.S. agriculture" after the period of high commodity prices, Swanson said, adding he does not see high prices returning in the next few years.
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Senate Agriculture Committee Chairman Pat Roberts, R-Kan., said last week farmers need "price recovery," but Swanson said "Prices will not save the day. Commodity production is about management and excellence."
Swanson said he expects another round of farm consolidation because bigger farms are better managed, but in an interview he acknowledged that whether farmers exit the business depends on their individual situations.
Farmers are unlikely to stop buying crop insurance because it is a small expense compared with rent, seed and fertilizer, he said. But they may expect better service or lower prices from fertilizer sellers and crop insurance agents.
Farmers who own their own land need to realize that land management and farm management are two businesses in one operation, he said.
Swanson said farmers need to ask themselves, "Am I farming to make money by farming or to get a payoff in the future?
He expressed skepticism about some of the theories in agriculture such as future demand based on population growth. The biggest population growth, he noted, is in Africa, which also has economic problems.
Of all the farm sectors, Swanson was the most negative on ethanol, which he said absorbs 40 percent of U.S. corn production.
"We never would have introduced biofuels if we had seen fracking coming," he said, referring to the hydraulic fracturing process that has stimulated natural gas and oil production in the United States.
Swanson discounted the importance of the Trump administration's use of small refinery exemptions to reduce ethanol demand.
The past two months have been the worst two for profitability in ethanol, but production has not slowed because there are high fixed costs in the industry, he said.
"Everyone is looking at who is going to go bankrupt first," he added.
The big challenge for ethanol, he said, is the likelihood that more and more consumers will switch to electric cars in which battery technology will dominate.
"No matter how much (Iowa Republican Sen.) Chuck Grassley loves ethanol he cannot mandate that a Tesla owner buy it," Swanson said. ❖