Many farm banks are as vulnerable today as those that failed in the farm crisis of the 1980s, a study by the Federal Reserve Bank of St. Louis claims.
Although most agricultural banks are profitable and well capitalized, a severe agricultural downturn could cause many to fail, concluded Kevin L. Kliesen and R. Alton Gilbert in their study, "Are Some Agricultural Banks Too Agricultural?"
Though many farm banks have diversified their portfolios, more than 1,000 still have more than half of their loans in agriculture. And many find it hard to diversify, either from lack of opportunities or from lack of interest by larger institutions that could acquire them and offer more diverse lending options.
Though the authors are not predicting an imminent collapse of the industry, they do note similarities to what preceded the last agriculture crisis.
"If you look at banks with a real high percentage of loans to farmers ... they look very strong," Mr. Gilbert said. "The disturbing thing is we find a very similar pattern in the late '70s. Because of their high concentration of lending to one particular industry, they were highly vulnerable when there was a downturn in that industry."
Between 1984 and 1987, 234 farm banks failed, about 43% of all bank failures during that time. By 1993 and 1994, just five of the 54 bank failures in those years were agricultural banks.
In better times, people tend not to think about the worst-case scenarios, Mr. Gilbert said. But many farm banks remain highly dependent on one industry, which has hurt them in past , he said.
In 1970, 17.3% of agricultural banks had 70% or more of their loans in agriculture. The number of banks with such a high loan concentration hit a low point in 1990, dipping to 9.1%, and then rose slightly, to 10.7%, in 1994.
Those with at least half of their loans in agriculture followed a similar pattern, shrinking from 46.3% in 1970 to a low point of 33.2% in 1985 and then rising again slightly in recent years.
Jeff Klick, vice president of $28 million-asset First American Bank, Woodward, Okla., said he is working to scale back the bank's percentage of farm loans to about 30% from about 50%.
And he knows how hard agricultural downturns can hit. He finances many cattle producers, whose income has dropped sharply from oversupply.
"There's a reason to be concerned," Mr. Klick said. "As far as deterioration in capital, I would say the severity of the ag situation really isn't known right now."
But Philip M. Burns, president of Farmers & Merchants National Bank, West Point, Neb., said farm banks "learned a lot during the '80s.
"We're better positioned to identify problems sooner with borrowers," said Mr. Burns, whose bank has about 80% ag loans. "I think banks do a much better job analyzing credits. I don't know of a bank that hasn't made significant changes in its portfolio."
One way farm banks can reduce risk, the study notes, is by requiring collateral on larger percentages of production loans, something banks did in the 1980s, but have eased.
And while new interstate banking and branching laws might seem to offer these banks opportunities to align with larger holding companies , big banks are not likely to buy small agricultural banks, the study said.
The authors concluded that these potentially at-risk farm banks should maintain higher capital-to-assets ratios.
In the interview, Mr. Gilbert conceded the study uses worst-case scenarios in the industry. But such situations have occurred - most recently in the 1980s and earlier in the 1920s.
"It's a danger that tends to occur only at long intervals and under the right environment," Mr. Gilbert said. "It would take some kind of abrupt change in the environment to create this."
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As expected, President Clinton signed legislation earlier this monththat phases out many government subsidies on agricultural crops, including corn, wheat, rice, and cotton.
Under the new law, known as Freedom to Farm, crop payments will decline to nothing after seven years, giving farmers more flexibility on what they plant.
The president had opposed some of the bill's main provisions because they don't give farmers a safety net, but reportedly signed the bill so farmers would know where they stand as they start this year's planting.
Bankers must now assess how the lack of government programs and payments will ultimately impact their future credit decisions.
