The Farm Credit System is reporting a 28% increase in bad loans this year and warns things may get worse if crop prices continue to tumble.
The system, the nation's largest farm lender, with $82 billion of assets, said its nonperforming loans jumped from $828 million at Dec. 31 to $1.1 billion at Sept. 30.
Daniel M. Bienz, vice president of financial analysis and disclosure for the Federal Farm Credit Banks Funding Corp., blamed the increase on a "few bad loans" to agricultural cooperatives such as grain elevators.
The delinquencies are isolated, he said, and do not indicate problems with overall credit quality or a specific financial product.
Still, the government-sponsored agency said more trouble may be on the horizon. In its third-quarter earnings statement, released last week, the Farm Credit System said that if crop prices remain low or poor weather hits, credit quality could deteriorate and prompt more loans to go bad.
Keith Leggett, an economist at the American Bankers Association, said the Farm Credit System may already be feeling the pinch. Grain elevators, some of which are delinquent on their system credits, have silos full of grain that they bought last year at record prices.
"Elevators hung on to the crop, waiting for prices to go up," he said. "But prices went down instead."
Now the elevators must sell the grain at a loss to make room for this year's crop, Mr. Leggett said.
Both Mr. Leggett and Bert Ely, a critic of the Farm Credit System, said they expect it and commercial banks to feel the full impact of low crop prices during the fourth quarter and into next year.
"We're now at the point in the year when farmers settle up with their lenders," Mr. Ely said. "That's when we'll see the problems."
Mr. Ely said many farmers are counting on prices to bounce back soon, but forecasts by the Department of Agriculture and economists are that prices will remain low through 1999.
The Farm Credit System, which nearly failed during the farming crisis of the 1980s, has worked to improve credit quality and increase its capital reserves.
Nonaccrual loans-those that are unlikely to be repaid-totaled 1.26% of Farm Credit's loan portfolio at Sept. 30. Though that is up slightly from yearend, it is still far below the 6.5% of the system's loans classified on nonaccrual status in 1988.
"Even though nonaccruals are up, they're not very high," said Mr. Bienz.
The system has also increased capital this year by 6.7%, to $12.4 billion, so that it will have a bigger cushion against bad loans.
Capital now equals 15.1% of the system's total assets, compared with 14.8% at yearend.
"People still remember what happened in the mid-'80s," Mr. Bienz said.