ST. LOUIS (DTN) -- Bankers' worries are shifting, said Jackson Takach, chief economist and vice president of strategy at Farmer Mac. Concerns about inflation are edging lower, while concerns about farm financial health are rising.

"Given the dip in grain commodity prices the last couple of years and concern about international trade markets, the grain-producer lending community is really focused in on profitability," he told DTN. They're worried about whether farmers are going to struggle to make regular payments and are preparing for conversations about rolling over operating loan debt.

Stagnant soybean sales to China are causing growing soybean piles around the countryside. For lenders, those beans represent a locked-up source of seasonal liquidity that's often used to pay fall bills. Cotton and rice are also seeing significant crunches due to low seasonal sales. Places where those crops are grown in concentration, like Arkansas, are feeling the pinch of disrupted trade the most.

Each year, Farmer Mac and the American Bankers Association survey ag lenders on their biggest concerns. Liquidity and farm incomes topped the list this year, although Takach said there are differences within the data. Banks with strong cattle portfolios aren't as worried because profits in the sector are near records.

RISING COSTS RAISE STRESS LEVELS

"Inflation is routinely listed as a top concern, but it's kind of bubbled down a little bit," Takach said, adding that farmers are feeling the inflationary pressure not only from the rising cost of inputs, but also from their household expense.

Pauline Van Nurden, the associate director at University of Minnesota's Center for Farm Financial Management, said their data shows it takes about $110,000 per year to cover total personal expenses for a family of three when you include taxes and larger capital purchases, such as replacing an appliance or family car.

Dr. David Kohl, ag economist and professor emeritus at Virgina Tech who regularly trains bankers, said he's hearing many family living expenses are getting wrapped up in operating loan renewals this year, in some cases to the farmer's detriment.

"This where your stress occurs," he said, citing anecdotal evidence from his discussions over the summer of rising divorce rates. He's heard a larger number of land sales are motivated by the dissolution of 30-plus-year marriages, which caused several bankers in the room to nod their head.

On the production side, Takach has heard of many creative ways farmers are attempting to control costs, like pooling together to buy inputs in bulk.

"Being proactive on the cost side can make a big difference," he said.

Van Nurden's deep dive into FINBIN data compared the cost of corn production between and high- and low-profit operations. For the 20% of farms in the database with the highest return, the average price to produce a bushel of corn was $3.77. For the 20% of farms with the lowest returns, the price per bushel jumped to $5.99.

"Look first at the things you can control," Takach said. "Some of that is going to be your input side. How can you control that overhead?"

Next, farmers need to manage their marketing.

Van Nurden's data showed since 2020, high-profit corn farms have received an average price that's $0.27 per bushel higher than low-profit farms.

"I still think there's a lot of opportunities to sell," Takach said. "I think being ready with a marketing plan is incredibly important. I say that in good times and bad times. Build a marketing plan, execute a marketing plan, and keep moving."

INTEREST RATE MANAGEMENT

Just like having a marketing plan, Takach said farmers need to create a plan to manage interest rate changes.

"Just like you have a marketing plan, you should have a capital management plan," he said. It should include targets for rates where you'd like to refinance, knowing whether your current loan has penalties, and a plan for when or if you need to take on more debt.

Kohl and Takach see short-term interest rates declining over the next year since these rates tend to track with changes the Federal Reserve makes to the fed funds rate. The Federal Open Market Committee lowered the rate range to 3.75% to 4% in October and will meet again Dec. 9-10 to determine whether to cut again. Takach said those changes almost always pass right through to farmers' operating debt.

"When we cut 75 basis points or 100 basis points in a year, that's real money. There's $150 billion of op debt out there that will cost less next year," he said. If an average farm borrows $1 million on an operating line, the interest rate savings will be around $10,000.

Long-term rates are less influenced by the Federal Reserve. Loans for mortgages and real estate tend to reflect the 10-year Treasury, which reflects a broader array of factors like fiscal policy and confidence in the U.S. government. Right now, that rate is around 4.25%, and while it could come down closer to 4% in the next year, Takach said he doesn't anticipate a big change.

Global disruption or recession could force the rate lower, but there's also a chance the rate could be pushed up by concerns about the U.S.'s total debt load.

"The more people are concerned about the fiscal health of the United States, the fewer investors put money into Treasuries, and that drives up rates," he said. "What I think will happen is somewhere in the middle."

For farmers who purchased land over the past couple years with a mortgage rate around 6.5%, having a target rate in mind can set the stage for a successful refinance.

"Think about it before you need it. Keeping a capital management plan will save a lot of time, a lot of money and a lot of headaches when things get tight," Takach said.

Katie Dehlinger can be reached at katie.dehlinger@dtn.com

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