As margins turn negative, farm loans deteriorate
Financial influenza could be spreading through farm country later this fall. While only a tiny fraction of all farm loans have been affected to date, the pork and dairy industries have eroded huge portions of their lifetime equity in the last year and face a wave of restructurings or forced sales in the next few months.
Given banks’ own problems, they may be in no condition to show lenience.
“Access to credit could be the top issue for all types of agricultural producers in 2010,” Steve Hofing, a managing partner in Centrec Consulting, cautioned a group of 75 farm operators who gathered in Chicago to discuss the state of the economy recently.
“At these commodity prices, very few operations in either crops or livestock can project profits,” Hofing said. What’s more, all farm lenders are becoming more selective in their credit extensions than they were. Underwriting standards haven’t necessarily changed, Hofing said. “What’s changed is the risk appetite of people who make the loans.”
So far, Kansas City Federal Reserve economist Jason Henderson said farm loan delinquencies nationwide are running below normal, but have edged up from 1.08 percent to 2.08 percent of bank farm loan portfolios in the last year. “It’s the trend people are concerned about, not necessarily the level of problem loans,” he said. Compounding the issue is that many of the small and regional commercial banks which make farm loans have credit concerns themselves, Henderson added.
So far this year, 81 banks have failed, the most since the early 1990s. Given the number of sour construction and commercial real estate loans many lenders must absorb, “Banks just won’t be willing to accept the level of risk they took in the past,” Henderson said. Problem loans have also crept up at Farm Credit System (FCS) lenders, al though not yet approaching worrisome levels. According to the Farm Credit Administration, non-accruals at FCS lenders have risen from 1.52 percent of total loans at year end to 1.83 percent by June 30, 2009. With the dairy, pork and ethanol industries under continued pressure, however, the system’s regulator has asked all institutions to stress test their portfolios.
It has also emphasized that all FCS borrowers are entitled to a “Borrower Bill of Rights” which allows them to propose options like debt restructuring, interest deferrals and re-amortization prior to a lender taking adverse action.
So far, financial stress has been isolated to the pork, dairy and ethanol sectors, said Texas A&M economist Danny Klinefelter. Still, he sees “cracks developing” in the crop sector. Many crop producers pushed record 2008 incomes into this calendar year, Klinefelter said, and that infusion is buffering their incomes now that commodity prices have crashed below production cost. As long as land values hold up, lenders should be willing to refinance carryover debts, but may insist on Farm Service Agency (FSA) guarantees or extra collateral to help them shoulder the loan risks.
“Demand for FSA loan guarantees is up, but it could be exponential by next year,” Klinefelter said. One worrisome sign of loan deterioration is that the number of farmers and lenders using mediation to resolve problem debts has edged higher in Minnesota in the past year. At the end of July, there were 488 farm mediation cases in the state, up from 133 the same time in 2008, the University of Minnesota reported last week. As a result, the state department of agriculture has activated a team of financial counselors in Extension and at local colleges to advise financially stressed operations.
“Dairy and hogs have had lots of red ink for a long time, so there’s no trouble understanding stress there,” said Rob Holcomb, an ag business management educator for Minnesota Extension in Marshall, MN, who counsels some problem farm borrowers. But input costs have increased exponentially for crop producers over the last few years. While 2009 may not pose immediate trouble, “The prices projected for 2010 could put a lot of crop producers upside down,” he said. “Frankly, the farm operators we’re seeing now were probably in trouble before these prices collapsed,” said Holcomb. They just borrowed way too much money when times were good, and haven’t been able to manage their marketing risk, he added. “But if commodity prices don’t improve, there’s a whole bunch of farmers right behind them.” — Marcia Zarley Taylor, DTN