32 MAY / JUNE 2017 The three-year decline in agriculture commodity prices, particularly in grain prices, has signaled a halt to a decade or more of increasing farm incomes. Farm incomes have been boosted since the early 2000s by steadily increasing production yields and the impact of the federal ethanol mandate. Reports indicate that all of the increase in demand for grain since 2000 has been the result of the ethanol mandate and increased grain imports by China. Ethanol currently consumes 38 percent of the U.S. corn crop. While post ethanol processed cornmeal remains a usable feed stock, it is yet to be determined what the impact on corn prices would be, if in 2021 the 10 percent fuel ethanol mandate is reduced or eliminated. The past three years have seen record or near record U.S. and world grain production, leading to increasing stockpiles of carryover grain. Additionally the 20 percent increase in the world value of the U.S. dollar over the past two years has made U.S. grains more expensive for export purposes. China is now importing grain from other markets. Grain future prices indicate that there will not be significant improvement in grain prices until at least 2019. Grain prices have rarely exceeded the cost of production during the past two years, and it now appears that trend will continue for two additional years. This level of financial stress in the farm community has not been seen since the 1980s, when an extended period of low farm incomes, following years of high crop prices, resulted in: (1) operating losses erasing working capital; (2) continued operating losses, causing increased real estate debt levels when operating loans could not be repaid; and (3) collapsing land values, as low grain prices and low incomes persisted, falling more than 50 percent. As a result, real estate debt levels exceeded land values. Today we are told that this type of decline will not occur again, because lenders have been more conservative about lending against real estate than in the 1980s; however, just as in the ’80s, there is unpaid operating debt being restructured as term debt on real estate. To date, land values have declined 15 percent from peak values, with additional declines expected. Only time will tell if future losses will continue for such an extended period of time that the problems of the ’80 will be revisited. What is a lender to do? Below are proactive steps: 1. Review and audit loan documents – • Confirm loan documents are in proper form and properly executed; • Have a knowledgeable person or attorney review all UCC filings to verify that collateral descriptions and debtor names are correct; • Verify no UCCs have lapsed; • Perfect liens on vehicle titles; • Make sure mortgages reflect proper maturity dates and the amount of debt secured by the mortgages; determine if all loans are properly cross-collateralized. If remedial action needs to be taken with respect to loan documents or collateral, it needs to be completed at the time of this year’s renewal. When the loan becomes a problem next year, it will be too late to obtain the borrower’s cooperation to fix any deficiencies. Agricultural Loans Under Stress What’s a lender to do? LENDING / CREDIT Bose McKinney & Evans LLP is a Diamond Associate Member of the Indiana Bankers Association. Article author Jim Carlberg Partner Bose McKinney & Evans LLP jcarlberg@boselaw.com
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