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Agriculture loan delinquencies rise in Q3'19, but some see signs of optimism

Agricultural loan delinquencies increased in the 2019 third quarter as the industry continues to struggle. In dairy, dozens of farms have filed for bankruptcy over the last year, but some experts are optimistic given recent price stabilization.

Farm loan delinquencies were up 2 basis points in the quarter to 2.11% of farm loans. Agricultural production loan delinquencies jumped 14 basis points to 1.66% of loans. Agriculture lending has suffered this year as tariffs, weather and low commodities prices have hurt farmers, driving late payments and raising the risk of losses for U.S. banks with significant exposure to the sector. The recent bankruptcy of a major fluid milk producer has highlighted woes in the dairy sector particularly, but milk prices were up in October from the beginning of 2019, giving some reason for positivity.

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The recent bankruptcy filing by Horsham, Pa.-based Dean Foods Co. has put a spotlight on the struggling dairy industry, particularly on the fluid milk that Dean Foods processes. "That part of the industry has had a declining demand for quite a while," said David Coggins, chief banking officer at Manitowoc, Wis.-based Investors Community Bank which reported agriculture loan concentration of 62.2% in the third quarter. Coggins said more than 80% of the bank's agriculture loans are in dairy.

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As dairy prices slumped in recent years, milk producers lowered output, said Ryan Yonkman, a risk management specialist with dairy consulting agency Rice Dairy LLC. Meanwhile, costs continued to rise.

"Profitability's been hit hard, and a lot of equity has been burned across the producer level over the last four years, to the point where you've seen a lot of dairymen go out of business," said Yonkman in an interview.

According to court filings, 48 farms in Wisconsin have filed for Chapter 12 bankruptcy in the 12-month period ended September 2019, the most of any state. However, Coggins said the bankruptcies are small relative to the total farms in Wisconsin. During a farm crisis in the mid-1980s, bankruptcies were "ten-fold what these numbers are," he said.

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Despite low profit margins, Yonkman said few dairy farmers have declared bankruptcy, instead choosing to sell or stop farming.

Coggins said other segments of dairy, including cheese and butter, have shown stronger growth than fluid milk. And milk prices have started to rebound. "Most people are suggesting the Dean Foods bankruptcy isn't a bellwether of storm clouds in the dairy industry," said Coggins.

Fluid milk prices have risen since the beginning of 2019. According to USDA data, milk prices were up 15.1% from January through October, with some regions seeing slightly higher increases. A reduction of supply can mostly be credited for the increase in price, Yonkman said.

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Coggins sees "profit potential over the next 12 months," particularly if prices for cheese and butter hold. "Most farms today have break-even ... prices that are below today's current prices," he said.

But this increase in profitability for dairy farmers will probably not lead to expansion, Yonkman said. "Milk production doesn't feel like something that's going to just take off going forward," he said. "A lot of dairymen are going to be in 'pay-down-debt' mode." Farmers may also use the increased profits to build equity, Yonkman said.

Bankers likely will also not have the appetite for growth, Yonkman said. "Banks have probably strapped down a little bit and they're not going to just lend more good money after bad," he said. "The lending community is going to be slow to expansion as far as writing new loans to grow."

When it comes to maintaining strong dairy accounts, Coggins said bankers have options to help, including working directly with farmers and their teams, as well as offering marketing or hedging help.

During good times, farmers need to lock in prices for a portion of their production, Coggins said. He is tentatively positive on the dairy market.

"It's one thumb up," Coggins said. "We're not quite to two thumbs up yet."

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