Lender sees 'serious lows' for beef

BISMARCK, N.D. -- If the 30 to 50 percent decline in calf prices continues, lenders say there could 15 to 20 percent fewer cow-calf producers in the game.

Tom Schmidt is an agricultural commercial loan officer for First Community Credit Union in Bismarck, N.D. He says if cattle prices don't improve, he expects 15 percent of his ag loan borrowers may not be able to survive. (Mikkel Pates, Agweek)

BISMARCK, N.D. - If the 30 to 50 percent decline in calf prices continues, lenders say there could 15 to 20 percent fewer cow-calf producers in the game.

"For cattle feeders, it's going to be a higher percent of people out of the market (who are) not going to be able to buy calves this year," says Tom Schmidt, an agricultural commercial loan officer for First Community Credit Union in Bismarck, N.D. "That'll be 30 to 35 percent."

The reason is simple: "When you take somebody's income and cut it nearly in half, it becomes a problem," Schmidt says.

He was awakened to the fact on Oct. 12, when he attended the season's first calf sale at Kist Livestock in Mandan, N.D, when some "lightweight" beef-type calves - 350 to 400 pounds - that would have brought $2.50 to $3 per pound two years ago were bringing $1.20 per pound. Some of the dairy-cross calves received 62 cents per pound.

"That's hard to make a lot of payments with," Schmidt says. "There were calves coming into the ring that did not net their owners any money whatsoever. It certainly makes you go back and start assessing loans rather quickly - looking at loans where you can assist and where loans are going to take more effort to work through. You're not going to sell them out, but to readjust, realign, and maybe even refinance to stretch some of that debt out in order to make it work."


North Dakota Agriculture Commissioner Doug Goehring says difficulties in the agriculture markets are causing more people to seek assistance with the North Dakota Mediation Service. The program has two full-time staff members, and contracts with 13 others throughout the state, especially on credit counseling. "We've had some discussions about ramping up our efforts," he says, noting that during the 1980s credit crisis there were more than 40 people working with the mediation service.

Goehring says things have been healthy enough in the ag economy since 2006 that there are few people with those skills who aren't already working for a financial institution or in business for themselves.

Loan issues

Schmidt loan issues will unfold through the calf selling season, which goes into February and March. It's not hard to imagine what's coming.

"Expenses have not come down; we're still looking at record-high land rents," Schmidt says. "It will be more difficult for some folks to pay their lines of credit in full and make their term debt," he says. "I expect there will be a huge erosion of equity."

The situation is worsened by prices of other commodities, farm equipment and land. Less value means less to collateralize against. It becomes harder to borrow money.

First Community is the largest credit union in North Dakota, with 15 branches from Fargo to Bismarck, and agriculture is a significant part of its portfolio, which involves commercial, consumer and home loans. Schmidt thinks the situation will be similar for anyone in the ag loan business, whether with banks or Farm Credit Services lenders.

Personally, Schmidt has a portfolio of more than 40 borrowers, about 80 percent of them are ag producers, and about 75 percent of his dollar volume is agricultural production. "I'm expecting most of my portfolio will make their payments this year," he says. "The problem will be next year when they come in to do their cash-flow (projections). Operating expenses won't have adjusted to that cash flow."


Ranchers have to decide whether they can or should feed cattle longer and hope for an upturn. Some don't have the feed or facilities to do that. Also there is the risk of further market declines. "Will carrying the calf make sense or not?" he says. "Probably not, if you purchase feed, you have to take that into consideration."

Getting real

Those who have been more conservative will be able to hunker down, Schmidt says. "I do expect operating loans to be paid back," he says. "It'll be just the term debt that might be hard to make."

One indicator about how bad things might be are that some land sat idle in 2016 because no renter was willing to pay what a landlord demanded for cash rent. An insurance contact told him about 3,000 acres went unfarmed in the Rugby, N.D., area.

Schmidt urges landowners to "get a realistic view of what's happening on the land you're renting to somebody." Compare the rent value to the yield and value of the production. "Most farmers are more than willing to show you what they produce off that land - at least get to a realistic point where it's profitable for the landowner and the farmer - especially if you're happy with that renter. He cannot lose money and continue to farm. It's not doable in the long run."

He says landowners might remember the high prices farmers were getting for commodities a few years ago, but before that, it wasn't good. "Three or five years of good years does not make up for 40 years of not covering your cost of production.

Schmidt can't say how far land rental rates need to come down to make things work.



Schmidt says the fairest contract is on a base of production with a premium formula. The landowner would share in profit for every bushel over a base. "That way the renter - if he doesn't make that production due to drought, weather or prices - is still able to pay that rent. But if there's a rebound, the landlord can capture some premium."

These are called "cash/share arrangements," he says. If the average production on the land is 40 bushels an acre for wheat, the agreement could be that any bushel above 40 bushels could be taken at one-fourth the value by the landlord. Anything below that, the renter has a base rate that keeps him in business.

"That's been the new thing, coming in the last few years," Schmidt says, but acknowledges only about 10 percent of landowners are doing it.

"Most landlords are still able to capitalize on high rent. They weren't interested in any share arrangements," he says. Farmers have been aggressive for cash rents in the past few years, but Schmidt thinks that will change. "I'd say that will be new for 2017," he says. The competition will still be there, but not for the premium prices."

A new crisis?

It's a bit of a replay of the 1980s for Schmidt, 52, who lives near where he grew up in St. Anthony, N.D. During the 1980s farm credit crisis, his father was in the excavating business but ranched on the side. Schmidt bought his first cows when he was 16, and remains in the business himself, although his primary income is banking.

There are differences between now and then, he says. In the 1980s new tractors were in the $24,000 range, and today a similar tractor might be $150,000. Diesel was 60 cents per gallon and today it's $2.39 a gallon. If cash rent was $20 then, today it's $80. Cattle are still higher priced than they were in the 1980s. In 1982, Schmidt remembers topping the market with 425 pound calves at $64.25 per hundredweight.

If producers have to sell land to get out, that is a problem because they lose their borrowing power, he says. "I think most people are going to have reassess expenses and land rents. If there's no profit in it, there's really no point in having it. This downturn does not appear to be short-term."


Goehring says one difference between now and the 1980s is that some farmers and ranchers are considering exiting the business while they still have equity and are seeing their value in the workforce. "I'm glad because when you're in that position, you tend to have tunnel vision and only focus on the problem," Goehring says. "You can feel like a failure."

People wanting information about the state mediation services can contact Betty Schneider, 701-328-4158, .

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