Trump's Trade Wars Are Hurting Midwest Farmers, Banks, and State Coffers

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Two farms a day closed in Wisconsin in 2018.

Scott Olson/Getty Images

For over a year, I have been writing a number of articles that Trump’s tariff threats and the actual imposition thereof, are hurting consumers, farmers, companies, and banks. Last July, for example, I wrote that banks needed to brace for Trump’s tariffs.  In September, I showed data and graphs that demonstrate that every state in the union is sensitive to trade tariffs, because they all have a wide variety of people employed in trade supported industries.

Hawaii, Nebraska, New York, South Dakota, and Connecticut have the highest percent of employed workforce supported by global trade.

Source: U.S. Chamber of Commerce and Bureau of Labor Statistics data.

Additionally, I believe that Trump’s trade temper tantrums were a large reason that the Federal Reserve recently cut rates.  The rate cuts will not spur investment in the real economy and are likely to only encourage companies to become more indebted than they already are, an equivalent of over 70% of GDP. These zombie companies will continue to threaten the U.S. economy and that of others. Markets have repeatedly reacted badly to Trump’s weaponization of tariffs.

Unfortunately, recent data are showing that my fears are justified, especially when it comes to Midwest states, heavily affected by the state of the agricultural sector. Almost seven years of low agriculture prices, recent floods, trade tensions, and tariffs are impacting agriculture borrowers.  According to the U.S. Department of Agriculture, Chinese imports of American agricultural goods has dropped over 50% from $19.5 billion to  $9.2 billion.

Washington, Louisiana, and California have the largest amount of targeted exports.

Source: U.S. Chamber of Commerce data.

According to Fitch Ratings analyst, Michael D’Arcy, “China’s recently announced embargo on US agricultural imports escalates trade-related risks to the US farm sector, which is experiencing falling sales, prices and land values from previous tariffs. Effects of this downturn are felt in state revenues, agricultural loan performance and corporate earnings.” Those states that are less populous and not as diverse economically and which have high exposure to agriculture are at most risk. “Midwest states, such as Iowa where farm exports are approximately 3% of the Gross State Product, and Nebraska and Kansas, are more likely to see reduced tax revenues and budget flexibility as a result of the large contribution of export-driven agricultural industries to their economies.”  Additionally, he went on to say that “Nebraska and Kansas, for which sales and income taxes accounted for 96% of general fund revenues in 2018, are more exposed to economic shocks than states such as Illinois and Minnesota that have greater trade exposure but less volatile revenue because exports account for a smaller portion of their economies.”

Michigan is the most reliant on global trade.

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We should all keep our eyes on banks throughout the US, but especially those in the Midwest and Texas.  Throughout the U.S., there are about 1,315 farm banks, which is about 25% of all Federal Deposit Insurance Corporation (FDIC) banks. According to FDIC data, agriculture loans held by FDIC-insured institutions total about $184 billion.

Regional Exposure to Agriculture Lending

FDIC

According to the FDIC’s 2019 Risk Review, “A slowdown in the agricultural economy is an important risk to the FDIC, because farm banks are a large source of financing for the agriculture industry and represent about one-fourth of banks in the United States.” Of particular concern should be community banks, which hold almost 70%, ($127 billion) of total agriculture loans. Importantly “Eight percent of all banks and thirty-one percent of farm banks hold a concentration of agriculture loans above 300 percent of total capital.” While bank exposure to agriculture lending is very concentrated in the Midwest,’ there are also agriculture exposed banks in Texas, Gulf Coast states, and Pennsylvania.

Net Farm Income Is Expected to Remain Below the Historical Average in 2019

U.S. Department of Agriculture Notes: Dollar values are adjusted for inflation. F indicates forecast.

Fortunately, loan restructuring has helped borrowers not reach the adverse credit quality and default levels of the 1980s. Yet, data are starting to show that ongoing trade tensions do not bode well for the US agricultural sector. Net farm income, which is a broad measure of profits, is forecast to increase 10 percent in 2019 but remain below the 25-year average. Also, of concern should be that delinquency rates on loans to finance agricultural production are at their highest level since they have been since the mid-2015s.

Delinquency Rate on Loans to Finance Agricultural Production, All Commercial Banks

Note: Shaded areas are recession periods. Source: Federal Reserve Board of Governors

Farm banks’ liquidity should also be monitored carefully.  According to the FDIC, “Farm bank liquidity has declined and funding is under pressure because of strong loan demand. The need for financing has increased because of declining net farm income, rising operational costs, and dwindling working capital, turning many farm customers from net depositors in past years to net borrowers in recent years.”  Deposit and asset growth have decreased while loans have been growing.  “As a result, farm banks continue to meet agricultural credit demand at the expense of balance sheet liquidity. The median ratio of short-term liquid assets to total assets at farm banks was a record first-quarter low of 20 percent in 2019.” Moreover, weak deposit growth has resulted in a growing reliance on wholesale funding; this may not be available if bank conditions deteriorate.