Continuing tension over the North American Free Trade Agreement is causing headaches for many U.S. farmers and concerns for agricultural lenders.
The Mexican government, which is looking for leverage in Nafta negotiations, cut back on imports of soybean meal, corn and chicken in the first four months of 2017, based on data from the Department of Agriculture. The pullback comes as U.S. farmers deal with other issues such as low commodities prices and overproduction in some segments.
Lenders, as a result, want Washington to do more to de-escalate the situation with Mexico.
Though Nafta could benefit from modernization, it is critical that lawmakers “do no harm” to trade, said Michael Salerno, lead director of global banking at First National Bank in Omaha, a unit of the $21 billion-asset First National of Nebraska.
“We have clients with long-lasting bilateral relationships with clients in Mexico,” said Salerno, who is also a member of the National District Export Council’s steering committee. “They’re expressing that it is a market and relationship they want to maintain.”
Banks with large agricultural concentrations would be wise to increase monitoring of clients with substantial ties to Mexico, industry experts said. Grain producers merit extra scrutiny given already softening prices.
“There’s no denying that this sort of thing causes heartburn in the short term,” said Jeffrey Stokes, the R.J. Hanson chair in agricultural banking and finance at the University of Nebraska-Lincoln. “If I was a banker, I’d be keeping an eye on anything that affects my client’s ability to service loans.”
“Farm incomes have historically been driven by farm exports,” said Jason Henderson, associate dean of Purdue University’s College of Agriculture. Bankers should encourage farmers to evaluate risk management, marketing strategies, crop insurance and revenue insurance plans, he added.
Farmers and lenders have some wiggle room, thanks in part to a good run that began in 2004 and ended with peak farm income of $123 billion in 2013, said David Widmar, an agricultural economist at Purdue’s Center for Commercial Agriculture.
But the numbers have been declining. The Department of Agriculture's estimate for 2016 profit — official numbers will not be available until August — was roughly half what farmers generated in 2013.
Loan-to-value ratios for agricultural lenders remain in “good shape,” said Steve Gabriel, chief economist at the Farm Credit Administration. Despite an “uptick in credit concerns,” he said, overall loan quality in the Farm Credit System “has been really rock solid for several years.”
Market conditions impact individual farmers differently and export numbers bounce around, requiring some perspective, industry experts said. Corn exports, while down in the first quarter, were high relative to the same quarter’s volume over the past five years.
Farmers who own land also have an advantage because they don’t have a land payment or rental costs, Henderson said. Many of those farmers are expanding.
Despite challenges, it seems premature to panic about the creditworthiness of the agricultural industry, some industry experts said. In fact, a retooled Nafta could ultimately benefit U.S. farmers.
Nafta will remain largely unchanged because of the quality and logistics of U.S. exports, predicted Pablo Sherwell, head of RaboResearch Food and Agribusiness for North America. RaboResearch is a division of Rabobank.
“I’d want to see this play out a little bit before raising the alarm,” Gabriel said. “Heck, when all is said and done, the renegotiated act may be favorable.”
