It's been a turbulent year for farmers.
Low commodities prices, foreign competition and a strong dollar are cutting into farm income. Lenders, which are starting to see a rise in delinquencies, are turning to government loan guarantees to offset risk and help borrowers with financing. Banks are also working with borrowers to restructure debt.
Despite these challenges, farmers and their lenders are well positioned — for now — to weather tough times, industry experts said. That could change if storm clouds linger into 2017.
"If this continues for another year or so, you will see a lot of loans suffering," said Steve Apodaca, senior vice president of the American Bankers Association's Center for Agricultural and Rural Banking. "Downgrades will have to be made and restructurings will have to occur."
The Department of Agriculture predicted in August that net farm income would be $71.5 billion this year. While up about 30% from earlier forecasts, it is still off significantly from a record $123 billion in 2013. Low commodities prices — the price of wheat, for example, hit its lowest level in a decade earlier this year — are a big reason for the decline.
Farmers in other countries, which are benefiting from improved technology and subsidies from their own governments, are producing more crops, spurring competition with U.S. farmers, Apodaca said.
A strong dollar is also making it more expensive for U.S. farmers, who export more than a third of their crops, to sell those goods overseas. Costco, for instance, earlier this year had been selling Irish-made butter at a lower price than its own store brand, said John Blanchfield, a principal at Agricultural Banking Advisory Services.
"Right now, our exports are not competitive with others in the world," Blanchfield said.
Those pressures are prompting banks to be more proactive working with farmers, industry experts said. Fortunately, most banks have been able to build strong capital levels. At the same time, past-due loans, while rising, remain relatively low.
There is also less leverage in the agriculture sector today compared to the farm crisis in the 1980s, said Julie Stackhouse, supervisory head at the St. Louis Federal Reserve. The St. Louis Fed covers a number of Midwestern banks that have high levels of ag loans on their books.
"I don't see anything imminent in terms of vast concerns," Stackhouse said. "Having said that, commodity prices are down, more loans are more stressed and bankers are paying more attention than they had to pay in the last few years."
Demand for ag loans could increase as farmers look to refinance existing loans, Blanchfield said. Some farmers, aiming to take advantage of positive market factors, got into poorly structured loans, including instances of using commercial lines of credit to buy real estate.
Refinancing some real estate debt to provide working capital is one way banks can help a good borrower survive a downturn, said Curt Covington, senior vice president of agricultural finance at the Federal Agricultural Mortgage Corp., or Farmer Mac. Farmers will also need to lower costs in areas like fertilizer and labor and, in some cases, look to cut capital expenditures and living expenses.
"Most pragmatic lenders have identified who in their portfolio they will have to work with," Covington said.
Gothenburg State Bank in Nebraska is helping borrowers lower costs by finding better interest rates, said its chairman, Matt Williams. Helping customers stay healthy will prove beneficial to everyone over time, he said.
"To do that, we might be willing to sacrifice some short-term interest rate gains," Williams said. "Keeping more happening in the economy benefits all of us, including the bank."
Some banks are leaning more than ever on the Farm Service Agency's loan guarantees. The agency, which guarantees a portion of each loan, had a shortfall in its fiscal year that ended Sept. 30 because of heightened demand. The agency has also started the current fiscal year with a backlog of loan requests.
Banking trade groups, meanwhile, have been fighting to get the agency more money.
The Independent Community Bankers of America is pushing a bill to eliminate taxes on interest banks receive from farm loans secured by agricultural real estate. Doing so would provide small banks with more flexibility to work with farmers who are struggling to repay their debt, while also while giving lenders a bigger incentive to stay in rural farming markets.
"Unless we have more funds in the FSA program, the problem could be even worse in fiscal year 2017," said Mark Scanlan, the ICBA's senior vice president of agriculture and rural policy. "With commodity prices low, a lot of operations aren't cash flowing. A lot of farmers won't see enough production to offset the low prices so that won't ease the stress that's building."
First Farmers Bank & Trust in Converse, Ind., is among the banks that use FSA loan guarantees to help farmers, said Norman Lavengood, the bank's director of commercial and agriculture lending. For more than 20 years, the $1.6 billion-asset bank, which largely serves corn, soybean and grain producers, has held an annual meeting for its farmers that features experts who cover important topics such as grain marketing and environmental management.
With the prospect of rising rates, First Farmers is also trying to help farmers lock in low pricing for loans in order to help them keep operating costs down.
"We try to work with farmers as best as we can, but banks are highly regulated," Lavengood said. "There are some things you can and can't do. We do our best to work within those parameters to get through these tough times."
Paul Davis contributed to this story.