‘Epic’ flooding forces ag banks to lean on farm agency

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In soggy corn country, rural banks are turning more farmers toward a government program that provides a taxpayer backstop to new loans. The reason? To get those customers through a year where many may not even put seeds in the ground.

A question remains whether lawmakers will need to do more to meet the demand.

The Farm Service Agency, which under the U.S. Department of Agriculture guarantees bank loans made to farmers and makes direct loans as well, is authorized to back or lend out a little more than $6.7 billion in fiscal year 2019, which ends Sept. 30.

As of last week, the agency has used up nearly $4 billion of this authority.

Policymakers and industry officials are watching closely to see if the current program can handle the anticipated burden.

A bill that passed in the House early this year would raise the agency’s combined loan and guarantee authority above $7 billion, but Juli Obudzinski, interim policy director at the National Sustainable Agriculture Coalition, said lawmakers may be forced to revisit the issue as farmers are increasingly unable to get loans from the private sector.

"We need to make sure if there is an increase in demand that appropriators are responsive," says Obudzinski, whose group represents midsize family farms that fear more congressional funding will be necessary. "In the very least, in the short term, making sure those loan programs have whatever money they need to service farms is absolutely important."

Farmers are in a crunch for time and funding as flooding across the Midwest has delayed planting. Corn seeds will have to be in the ground this month, and crop insurers are already scaling back the losses they are willing to cover the longer farmers wait.

With crop prices already compressed from the Trump administration’s trade war with China, agriculture lenders are rolling over more debt for their farming neighbors through the FSA, rural bankers said. The department guarantees 90% of the losses on these farm loans in the event of default.

In an effort to give the agency a boost, lawmakers last year increased the size of loans it can back or make for farmers across its various programs, which was a big win for the banking industry. For instance, the FSA can back loans of as much as $1.75 million for buying more land or funding business operations; that was an increase from a little more than $1.4 million previously.

But some farming groups, like the agriculture coalition and the National Farmers Union, have been worried these higher limits will lead to larger but fewer loans, “reducing credit availability to small and midscale firms, many of whom are beginning farmers,” the groups wrote in a letter to congressional appropriators last year. Demand for the FSA's loan programs has outpaced nearly all of the agency's available funding in recent years, the letter said.

"If the pot of appropriations stays the same and FSA is now able to make larger loans, it’s very easy to see they will make fewer loans," Obudzinksi said. "Our fear is that folks are going to drop right through that safety net."

Industry officials predict the current crisis could lead to an increase in loan guarantee and direct lending authority for the FSA.

"We may see the need for more funding down the road," said John Blanchfield, an industry consultant at Agriculture Banking Advisory Services. "For now, funding levels seem adequate. If demand exceeds current funding levels, I believe Congress would approve additional funding for the program because of the reputation of the program and demonstrated underwriting soundness."

A spokesman for the FSA did not provide answers to a series of questions about whether the agency expects to back more loans and if it is taking on more risk.

The agency backed more than $5.4 billion in a variety of farm loans in the fiscal year ending in September. While that was a 9% decline from the previous year, experts expect that number to grow in 2019.

“I would expect to see that turn around here,” said Chad Hart, an Iowa State University economist who specializes in crop markets.

Banks with heavy concentrations of farm loans in particular are leaning on the agency to hedge their risks, and many of them are smaller banks.

About 98% of the loans written by Nebraska’s Bank of Newman Grove are for farmers, and the bank conducts special stress tests of its clients depending on how their finances would weather different drops in the price of a bushel of corn.

“The FSA has been a very good lifeline,” said Patrick Gerhart, president of Bank of Newman Grove, which has about $34 million in assets.

The USDA estimates that just two-thirds of the corn that can be planted across acreage the agency tracks is in the ground, according to a report Monday.

Corn is typically 96% planted by this time, according to historical averages.

Some states are more flooded than others. Roughly 88% of the corn is planted in Nebraska, while 80% is in the ground in Iowa, 45% is planted in Illinois, and just 31% of corn is in the dirt across Indiana farms.

“This is an epic flood that we’ve experienced here,” said Alan Emshoff, chairman of the Nebraska Bankers Association.

Robert Hartwig, the agriculture liaison for the Iowa Bankers Association, said in some parts it is “getting scary” for farmers, but overall lenders are working closely with them to figure out whether to go ahead and plant or take the insurance claims. Others may plant anyway and rely on money from the Trump administration's $16 billion assistance plan meant to offset harm to their bottom lines from tariffs.

Jim Levick, president of Nebraska State Bank, which has about $50 million in assets and a 97% concentration in farm loans, said the area round Oshkosh, Neb., with a population short of 900, has been largely spared the worst of the flooding. Still, depressed market conditions are affecting the bank and its customers.

"Our hedging really is that FSA guarantee," Levick said.

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