President Donald Trump’s trade wars are pushing America’s rural economy toward a full-blown meltdown after years of financial hardship, causing more farmers to default on loans while putting the squeeze on agricultural lenders.
Farmers have seen their net income plummet by half since 2013 and are now expected to hold nearly $427 billion in debt this year — the most since the farm crisis in the 1980s. The default rate for farm loans held by banks hit its highest level in seven years in the first three months of 2019.
In Iowa earlier this month, Trump blamed his predecessors who “did nothing” about falling farm income, while crediting his own administration for “turning it all around.”
Except he hasn't. Instead, his trade battles have accelerated the deterioration of financial conditions. Retaliatory tariffs from major trading partners like China and Mexico have slammed U.S. farm exports and taken a chunk out of commodity prices. And soaring debt levels are pushing more and more farmers and ranchers — already suffering from epic floods — toward insolvency.
Grant Kimberley, a corn and soybean grower in Iowa, sees rising risk as many farmers burn through their equity, sink further into debt or opt to leave the business entirely. Many producers are staying afloat by putting off fixing their tractors and sacrificing other investments in their farm operations, he said.
“How many black swans have we had in the past couple years?” he said. “We’ve had weather, we’ve had African swine fever, we’ve had trade wars. I’d say this is pretty unprecedented. We haven’t seen anything like this since the ’80s.”
The troubles in farm country are a stark contrast to the overall economy, which reached 3 percent growth last year and where banks have been making record profits. Yet if the economy slows this year, as many economists predict, farmers could again be among the hardest hit.
Trump, who won the majority of agricultural states in 2016 and retains wide support there, has given farmers some temporary relief by offering billions of dollars in emergency aid to “make it up” to those battered by the trade wars.
Still, farmers are already falling behind on their loans at a higher rate this year, the Federal Deposit Insurance Corp. reported last month, straining community banks concentrated in the central U.S. One-fifth of farm borrowers increased the amount of debt they carried over from the year before in the first quarter, according to the Federal Reserve Bank of Kansas City.
“Thousands of banks are in what you’d call rural areas,” said Mark Scanlan, senior vice president of agriculture and rural policy at the Independent Community Bankers of America. “When the ag economy starts taking a downturn, it affects them because it’s not only farm loans, it’s also those businesses that sell to farmers” that get hurt.
“We can’t project what the way out of this is going to be,” he added. “We just have to buckle down.”
Lenders that specialize in agriculture have been tightening credit standards as the situation for farmers becomes more dire and relying more on USDA-backed loan guarantees. But bank regulators like the FDIC are still keeping a watchful eye as risks build for institutions with large exposure to agriculture.
“We are monitoring farm banks’ concentration risk, which continues to rise, particularly in counties where economic risk associated with agriculture is high,” said FDIC General Counsel Nick Podsiadly in a June 13 speech. “These institutions include a number of farm banks whose agricultural loans exceed 300 percent of total capital.”
The default rate for ag operating loans held by banks was 1.26 percent during the first quarter of the year, but that’s still well below the rates in the 1980s, which stayed above 3 percent for much of the decade, reaching as high as 8.64 percent during the first quarter of 1986.
Gus Barker, CEO of Iowa-based First Community Bank, said his own institution is addressing the risks from the increasingly precarious financial conditions for his ag clients. He said the FDIC’s list of “problem banks,” which are at risk of failure, “is very, very low right now.”
“That is something to watch going forward,” he added. “If this continues, you’re probably going to start seeing some of those enforcement actions put in place for certain banks. It’s inevitable.”
While trade tensions with Canada and Mexico have eased, Trump’s feud with China — a crucial customer for soybean farmers and other agricultural producers — has escalated. The president hiked tariffs on $200 billion in Chinese goods in May, and soybean prices promptly sank to their lowest level in a decade.
“We definitely have observed a pretty significant pullback in terms of exports of ag products” to China, said Nathan Kauffman, vice president and Omaha Branch executive at the Kansas City Federal Reserve. He said the numbers of farm bankruptcies seemed to have increased, “albeit modestly,” in the dairy, corn and soybean sectors.
But he also stressed that many ag banks have taken a more conservative approach to lending, keeping in mind the lessons of the 1980s, and so far have continued to perform well. Still, “there are certainly some risks to be mindful of,” he said.
Massive stockpiles of crops that farmers are struggling to sell, due to the trade war and low prices, are partly to blame for the growing number of producers unable to pay their debt on time, said John Newton, chief economist at the American Farm Bureau Federation.
“This year being the fifth year in a row of lower commodity prices, a lot of people have eroded their financial positions just to get to this point,” Newton said. “We’ve heard reports of people taking their short-term debt and rolling it into their long-term debt, and that’s certainly not a recipe for success either.”
To counteract the financial fallout from his trade war, Trump has directed USDA to design government aid packages for farmers struck hardest by retaliatory tariffs. A new $16 billion program announced in May comes on top of roughly $11 billion in trade relief that USDA has been doling out to farmers since September.
That has helped farmers offset their financial losses, allowing more producers to break even or eke out a profit. But most in the industry say the ad hoc aid is just a temporary bandage to stem the bleeding.
Trade policy is “another variable you can’t control, just like the weather,” said Jeff Gruetzmacher, executive vice president at Wisconsin-based Royal Bank.
Farmers, ranchers and rural communities battered by extreme weather over the last year are also counting on new emergency funding that Trump signed into law this month. USDA is in the process of implementing the aid programs, including more than $3 billion to offset crop and livestock losses.
Agricultural forecasters are warily monitoring farmland values, which have remained relatively steady as other economic conditions have worsened. Industry and government analysts have warned that values are likely to trend lower in 2019, as growing financial stress could lead more farmers to sell their land and thus drive down prices.
Newton said he has heard reports that many more farms are on the market in the Midwest than at this point last year. “If those land values start to decrease, the farmer’s equity position weakens in a hurry: Your debt levels are still record-high, and your asset values are going down,” he said.
Equally worrisome for some farm economists is the prospect of a slowdown in the broader U.S. economy. As commodity prices have fallen and farming has become less profitable, many producers are dependent on non-farm income to stay afloat and continue to service their debt.
Kimberley, the Iowa farmer, said the financial headwinds converging on agriculture have created the “most unpredictable, uncertain period of time” for farmers since the 1980s crisis.
“Farming always has ups and downs,” he said. “But I think this one’s off the charts."