"Loan losses are up," said Edward "Butch" Ewertz, vice president of Security State Bank of Hunter in North Dakota. "We're $60,000 behind in earnings as compared to last year." Just as some farmers are hurting financially, some agricultural banks are also feeling pressure, but most remain profitable during the current agricultural downturn. (See agricultural credit survey.)
An agricultural bank is defined as any bank that has at least 25 percent of its loans in farm production or loans secured by farm real estate. In 1998, over half of the 918 district commercial banks were considered agricultural banks. District commercial banks had over $10 billion in agriculture loans outstanding in 1998, or about $58 for each of the district's 173 million farm acres.
Low commodity prices have hurt farmers' cash flow, so farmers are delaying operating loan repayments. "Delinquencies on farm accounts have increased," said Tom Harlow, vice president of agriculture loans at Northern State Bank, Thief River Falls, Minn.
In response to increased loan delinquencies agricultural banks have had to increase loan loss expenses. Agricultural banks' provision for loan losses for the first six months of 1999 was $21.5 million, an increase of over 18 percent from the first six months of 1998.
In addition to reduced loan payments, farm deposits have decreased. Several rural banks reported reduced farm deposits as farmers are using bank balances to cover spending. Large agricultural banks' deposit levels, excluding brokered deposits, dropped over 5 percent from June 30, 1998, to June 30, 1999.
Banks have seen reductions in deposits because farmers use "every bit of money," said Elouise Cobell, chairman of Blackfeet National Bank, Browning, Mont. This leaves farmers with little reserve, and Cobell expects operating loans will be restructured after harvest. Cobell's staff spends a lot of time working with farm customers to determine equitable payment plans, she said.
Financial pain relief
Even with increases in loan losses, banks are still making money. District agricultural banks' return on average assets in the first half of 1999 was a positive 1.7 percent. Agricultural banks are protecting themselves from huge losses by using many different strategies, including referrals to other lenders, diversifying loan portfolios, requiring more collateral and income assignments on government payments. Banks are referring many riskier farm customers to federal lending agencies for assistance, said Harlow of Northern States Bank.
Moreover, the agriculture loan volume decreases have been offset by increases in consumer, residential and real estate loans. In addition, lenders are requiring more collateral for agriculture loans. Several lenders reported that most agriculture loans are cross-pledged with crops, machinery and real estate and are also protected with assignments of conservation reserve program and government insurance payments.
Not as bad as the 1980s
Lenders are not as drastically affected now as during the mid-80s farm crisis. Bankers now require more collateral and land prices remain stable. The farm problems today stem more from reduced cash flow, as compared to the severe downturn in land prices that occurred in the mid 1980s, Harlow said. The reduced value of collateral during the 1980s forced many lenders to call in loans before they were due, which exacerbated crisis conditions, said Scott Nelson, vice president of agriculture lending of Bremer Bank, Menomonie, Wis.
The big difference between now and the 1980s farm crisis is "good operators are going out now," said Security State Bank's Ewertz. "In the '80s, farmers did not know the cost of production. Now farmers can tell you the cost to the penny of growing a bushel of wheat," Ewertz said.
Not only are agricultural banks feeling financial pain, they are feeling emotional pain as well. Some farmers are "almost at the point of suicide," Ewertz said. A lot of time is spent with farmers on financial and emotional issues. This adds stress on the agriculture lender, Ewertz said.
"Farmers are more than a bank customer," Harlow said. In rural areas farmers and bankers spend a lot time together in social activities, he said. Farmers realize that they are not the only ones hurt by low commodity prices, Harlow said, and they are pessimistic about the future of farming.
In addition to commercial banks, the Farm Credit System (FCS) is an important source of financing to farmers. At the end of June, FCS had almost $70 billion in loans to U.S. farmers. In addition, FCS earned $592 million in the first half of 1999. FCS provision for loan losses for the first six months in 1999 was $108 million, a more than 200 percent increase from year-earlier levels.