Longtime farmers are all too familiar with the outcomes when a drought moves in and takes over, killing crops and livestock.
However, the most recent arid conditions have caused some to brace for what could potentially be one of the worst droughts in 50 years.
The latest alert from the U.S. Department of Agriculture revealed that 218 counties in 32 states have been declared natural disaster areas due to extremely dry conditions. Among the crops taking the hardest hits are corn and soybeans, staples in states such as Indiana and Iowa.
According to the USDA, the nation’s corn crop was worth $76.5 billion in 2011 and is currently rated poor or very poor. Nearly 40% of the soybean crop valued at roughly $36 billion last year, received the same ratings.
The 2012 calf stocks are on track to drop by 2% and drop further over the next year, according to the Purdue University Cooperative Extension Service, which does research on agriculture.
For credit unions that have a history of agricultural lending, they seem to instinctively know how to shift and adjust to meet the needs of those members who rely on farming. As of March 31, there were 272 credit unions, or 3.8% of the industry, that offered agricultural loans, according to Callahan and Associates Inc.
The $600 million Beacon Credit Union in Wabash, Ind., is the top agricultural credit union lender in the country with approximately $375 million of such loans in its $620 million total loan portfolio, said Todd Beehler, chief lending officer.
While the cooperative has been engaged in agricultural lending for 81 years, Beacon has seen enough droughts and natural disasters to know how to prepare to help its members.
“We haven’t changed our lending policies or underwriting guidelines,” Beehler said. “We realize that it’s going to be cyclical. There will be times when things will be good and when there will be challenges. We counsel and work with people in the good times and the bad times.”
Still, Beehler said the drought will certainly affect farmers this year, especially in southern Indiana. Some were fortunate enough to get some spotty rain showers or managed to get their crops planted in the ground well before the arid conditions moved in, he noted.
Indiana is a predominant producer of corn and soybeans, Beehler said. While there isn’t a large presence of specialty crops, he said some farmers do plant green beans, melons and potatoes. Dairy operations are also big and may be impacted because the livestock depend on feed, which is often raised by the farmers. If farmers have to purchase their feed from outside, livestock prices will increase because of the drought, Beehler said. To deal with such outcomes, some took proactive measures years ago.
“Over the last few years when the ag economy was very strong, farmers had been wisely investing in irrigation systems, which have been a huge payoff,” Beehler said. “A lot of farmers have hedged their bets by purchasing a lot of crop insurance to help with any shortfalls.”
Federal disaster relief programs are poised to provide some aid. Earlier this month, the U.S. House passed a $383 million emergency relief package for livestock producers affected by the drought, and President Obama recently said an additional $30 million in relief will be available.
Meanwhile, Beacon will deploy a number of aid strategies on a case by case basis, Beehler said.
“If we need to shift short-term debt over short-term losses to leverage equity, that’s what we’ll do. We’re going to look at operations, cash flow and projections for a normal year going forward,” Beehler said. “Hopefully, over the last few years, they have saved and paid down debt and in a drought like this, they might be able to absorb it.”
Beacon has seen its share of hardship among its farmer members. Beehler recalled an interest rate flux in the early 1980s, a drop in hog prices in the late 1990s and a dairy price plummet in 2009. Despite the changes, Beacon’s model toward success has been to stay consistent and dedicated to being in ag lending for the long term, he offered.
North Dakota, which is also a top producer of corn and soybeans, is faring better than some other drought-stricken states, said Steve Schmitz, president/CEO of the $400 million First Community Credit Union in Jamestown, N.D.
“There are some areas that have been very dry but quite a bit of the state has gotten adequate moisture,” Schmitz said. “Last year was the wettest year on record.”
Within First Community’s $350 million loan portfolio, $120 million are agricultural loans, Schmitz said. Starting in the early 2000s, the credit union went through nearly seven years of very strong agricultural lending, he pointed out.
For situations like the current drought, First Community will use government programs to get the loan guarantees if a farmer’s equity has taken a hit. If a farmer has a really bad year, the credit union will try to restructure the loan. Crop insurance has been a life saver for many farmers because it will make them whole if losses occur. Recovering from livestock losses is another dilemma.
“It’s usually not available and if it is, it’s very expensive, and you can’t really lock in,” Schmitz said of livestock insurance. “A lot of livestock producers don’t have the means to buy it. Everyone who has crops has crop insurance.”
So far, the drought has not affected First Community’s lending, Schmitz acknowledged. There have been cases where cattle farmers are running out of hay and grass due to the lack of moisture in the ground. After reaching historic highs in 2011, cattle prices are dropping a little more this year.
“When you buy high and sell low, that’s not going to be good for farmers,” Schmitz said. “A number of factors like high corn prices are going to have an impact.”
First Community is located in the southeastern part of North Dakota where, in addition to corn and soybeans, wheat and barley are farmed. Further north, more wheat, sunflower and canola can be found.
“When we look at the picture in Iowa and Indiana, we’re doing very good,” Schmitz said. “It’s not great, but North Dakota is not suffering as nearly as other states.”
Indeed, insurance coverage has helped to weather Mother Nature’s wrath. In 2009, CUNA Mutual purchased ProAg, one of 15 federal government-approved insurance providers to farmers and the nation's sixth largest writer of crop insurance.
The subsidiary is seeing a significant number of claims from throughout the Midwest, particularly in the eastern corn belt, said Rick Uhlmann, CUNA Mutual senior manager of media relations. However, the financial impact of these losses won't be known until after harvest. In many areas, there is still room for some level of recovery with timely rains. Farmers have until mid-December to file claims, he added.
“Like farming, crop insurance results can be extremely variable. ProAg and CUNA Mutual Group have enjoyed better than average results from strong underwriting performance over the past several years, so a difficult year like 2012 that balances out our long-term experience is just part of the business,” Uhlmann said.
Since ProAg is a national crop insurance writer, it can count on positive results in other areas of the country to offset losses in the Midwest, Uhlmann explained. For example, 2011’s drought-related losses in Texas and Oklahoma were more than offset by its underwriting in other key agricultural regions of the country, he said.
More than 90% of the crop insurance business ProAg writes carries a loss backstop from the U.S. government, Uhlmann said. It’s meant to limit crop insurer losses resulting from catastrophic events. ProAg also further mitigate potential losses through reinsurance agreements.
The $657 million Central Minnesota Federal Credit Union, the largest federally insured credit union agricultural lender in the country, not only encourages farmers to invest in crop insurance it requires a certain percentage to cover at least half of their crops, said Richard Odenthal, president/CEO.
“We want to partner with our producers because if they fail, we fail,” Odenthal said. “We’ve been very fortunate, though. From an agricultural base, we’ve never lost money on agricultural property.”
Of Central Minnesota’s $544 million loan portfolio, $233 million are ag-related loans, Odenthal said. The credit union analyzes its agricultural loan processes similar to asset and liability management deploying what-ifs scenarios such as what would happen if inputs go up or down. Be it with price or production, Central Minnesota will try to make sure there is equity in the operations to maintain any fallback positions.
“We shock the system. Have we changed our policies? No, because we have those kinds of systems built in to look at things like if commodities go down,” Odenthal said.
Livestock, again, poses some different maneuvering. The life cycle for the production of milk is between two and three years, Odenthal said. Beef cattle have a similar run while turkey and chicken have shorter spans. The bottom line is because of their cycles, it may be harder to calculate certain scenarios especially when it comes to potential losses brought on by a drought.
“When you get into livestock such as dairy cows, hogs and chickens, you’re going to run into potential problems,” Odentahl said.
When diary prices went down a few years ago, Central Minnesota was able to accommodate affected farmers with things like interest-only loans. While milk prices are up now, Odenthal said the credit union would like to see some production capabilities built in to farming operations so that they’re not subject to market fluctuations.
“Minnesota, for the most part, is doing well. Some of our crops might have a 20% to 30% yield,” Odenthal said. “Some of the farmers have had bumper crops because of the rain.”