The last few years have been golden for American farmers along with the credit unions and banks that serve them, but there are signs that the good times may be coming to an end.
With commodity prices expected to fall, many agricultural lenders anticipate farmers could have trouble making loan payments this year. Farm CUs and banks are bracing for a tough year ahead — and hoping that it's no more than a one-year dip.
Net farm income across the country is expected to drop 26% this year, to about $96 billion, according to projections released last month by the U.S. Department of Agriculture. The main cause of the projected decline is falling crop prices, particularly corn, wheat and soybeans — three cornerstone crops in the national economy that the USDA predicts will fall back nearly to their 2010 prices.
This gloomy forecast could signal the end of the U.S. farming boom, which has led to record-high profits for farms and ag lenders over the past three years.
"The fortunes of the farm banks will mirror the fortunes of the farmers," says Mark Scanlan, senior vice president of agricultural and rural policy at the Independent Community Bankers of America. "Record income in agriculture is never something you can expect to keep going forever, so farmers and bankers will have to be on their toes."
One CU's Perspective
If the government and some analysts are crying wolf, however, at least one credit union is keeping calm.
Andy Waldock, VP of business lending at First Community CU in Jamestown, N.D., noted that much of the decline in agricultural income in his area is based around drought and its impact on corn and soybean crops—as much as a 50% decline, in some cases, he said.
"Farmers and ranchers build debt and borrow in good times, and if we see continued drought they'll purchase less equipment and that sort of thing and pay that down. That's likely to happen. That's what I've told management here."
With more than $170 million in agriculture loans, $471 million First Community is the No. 3 credit union agricultural lender, but Waldock said the CU expects its loan volume to stay fairly flat.
"You have to remember, I've been around for 39 years, so I saw the big tip over in the late '70s and early '80s, and I lived through that and lived to tell about it. This is totally different," he said. "Agriculture is capitalized so much better now than it was then. Seventy to eighty percent of the farmers out here either don't borrow or don't borrow enough to stick in a thimble. It's the 25% to 30% that borrow most of the money, and that's been that way for a long time. We renew their operating loans, so we've talked to them all winter."
What First Community is seeing, he said, is a 70% drop in requests for new equipment purchases, which is just sanity on their part."
But where commodities are projected to slide, one area of the agriculture business that isn't expected to drop is the livestock business. Waldock pointed out that the cattle business is "sky high," along with hogs and poultry.
"It's the grain side of it that may suffer," he said. Livestock amounts for about $35 million of First Community's $170 million ag lending portfolio.
The state also continues to benefit from the oil boom that in recent years has brought record-low unemployment to the state and raised wages significantly. As part of that, First Community has worked to expand its business portfolio to places like Lake Bismark and Fargo, related in part to the oil booms.
"The impact even to Grand Forks and Fargo from the fracking is huge," he said. "A lot of those businesses do something in the oil patch in Jamestown in the middle of the state. Seventy percent of the non-service businesses in Jamestown do something in oil patch."
Waldock suggested that most farmers are still determining what crops they will plant for next year, "but most of them will follow their same rotations and continue to do what they've been doing," despite the uncertainty surrounding commodities prices. Because the last few years have been so good, he added, most farmers are using newer equipment that they will likely not need to replace for another two or three years.
"Any loan you wrote in 2011 or before," said Waldock, "in this area land could drop by 40% and if you loan 70% of the appraised value at that time you'd still be at 60% of the value. It's just the loans that were written in '12 and '13 [that could be troublesome]. And that's a small amount—those people are well capitalized. There's lots of cash on their balance sheets."
One Of Few Bright Spots
Agriculture has been one of the few bright spots in the U.S. economy since the financial crisis, as high international demand for crops — particularly from China, which in 2011 became the biggest importer of U.S. crops — and an increasing reliance on ethanol-based fuel have pushed up commodity prices.
The extra income has allowed farmers to finance investments in land and equipment. Total farm debt rose by 15% from 2009 through 2013, to more than $309 billion, according to the USDA
"If it's a one-year turn, most everybody will survive, because they've got cash on hand and they're not over-leveraged," says Bob Wray, the president of the Capital Corp., a Kansas investment bank that advises many rural lenders. "Right now, bankers are more worried about loan demand and margins than they are about default."
Margins and loan demand have begun to dip, ag lenders say. But the downturn in farm revenue could actually help boost demand, by forcing farmers to borrow as they deplete their cash reserves, say experts.
During the boom, farmers were able to finance improvements and purchases in part with their own working capital. A downturn may force them to borrow a higher proportion of the money they invest in their farms.
Most observers expect ag-loan defaults to remain low. Nonperforming agriculture loans fell by $402 million in 2013, to $3.1 billion, and the nonperforming loan ratio fell by 26 basis points, to 1.22%, according to the ABA.
However, many ag lenders predict that their clients will have trouble making loan payments this year.
Further Complications
Complicating matters for farmers and lenders is the farm bill that President Obama signed into law last month. Credit unions and small bankers generally approved of the bill, which expands crop insurance significantly.
But the bill ends direct payments to farmers. These politically controversial payments are fixed subsidies sent to farmers regardless of changes in crop prices. The USDA expects government payments to farmers to drop more than 45% this year, to $6.1 billion, largely as a result of the new law.
Despite the projections for 2014, most ag bankers and industry analysts are not overly worried, at least for the short term.
And a prolonged slump may force changes to the farming price structure that will reduce banks' margins. As the ag boom has boosted profits, it has also driven up the cost of land rents, fertilizer and equipment, which will begin to pinch farmers if their incomes fall further.
Farmers and ag lenders are aware that revenue is influenced by factors that cannot be forecast accurately. For instance, corn and wheat prices, which were expected to fall, have rallied in recent weeks as the conflict in Ukraine has intensified, and a drought in Brazil has helped push up soybean prices.
