When interest rates were hovering at or near record lows, agricultural banks were generally able to fund variable-rate farmland loans with certificates of deposit.
But that is starting to change, according to Jeff Wolfgram, a vice president at the $533 million-asset First Dakota National Bank in Yankton, S.D. Now that rates are rising, borrowers want long-term, fixed-rate loans, which can pose funding challenges for the banks that make them.
One option for addressing funding concerns is Farmer Mac, which Congress created in 1988 to form a secondary market for agricultural and rural real estate loans and to provide long-term credit for rural residents.
To encourage more banks to use its programs, the government-sponsored lender announced Monday at the American Bankers Association’s annual agricultural lending conference that it is offering discounts to the trade group’s members.
Typically, Farmer Mac will buy only loans set at or above a certain interest rate. But under the agreement with the ABA’s members, it will buy lower-rate loans, so the banks can offer lower rates to their customers.
In addition, ABA members can use a dedicated customer service line and e-mail address to contact Farmer Mac. Also, if a bank does not have the expertise to use Farmer Mac’s programs, Farmer Mac will prepare the loan documents.
John M. Blanchfield, the director of the ABA’s Center for Agricultural and Rural Banking, said the trade group is trying to help members use Farmer Mac’s programs to be more competitive with other agricultural lenders such as the Farm Credit System. Though the alliance does not create any products for ABA members, it makes it cheaper and easier for banks to use programs they were not previously using.
“What we’re trying to do is get our members to take a new look at what Farmer Mac has to offer,” Mr. Blanchfield said.
Currently, many farmland loans have variable rates that reprice every two to three years. Borrowers wanted these types of loans when they thought interest rates would remain low. Now that interest rates look like they will rise, farmers want to lock in long-term rates the same way many homebuyers do with their mortgages.
“First and foremost, farmers are asking for long-term rates,” Mr. Wolfgram said. “They read the newspaper like everyone else does. They are talking to someone who has a 30-year, fixed-rate loan on their house in town.”
Mr. Wolfgram said agricultural banks need a way to offer long-term loans, but they cannot keep the loans on the books, because they do not have long-term funding to match the loans. Because Farmer Mac loans will not be on a bank’s books, bankers need not worry about things like reserving for loan losses, having too many loans of a single type, or having enough room for a loan under its lending limits, he said.
To better connect with agricultural lenders, Farmer Mac has also moved its underwriting staff to Ames, Iowa, from its headquarters in Washington.
