While much of the nation's economy is sputtering, the agricultural sector — thanks to soaring commodity prices — is booming, and bankers are eager to meet what they expect to be abundant demand for operational loans.
NBanC, a unit of the $410 million-asset NBC Corp. of Oklahoma City, is projecting its volume of agricultural loans will rise 20% this year, while United Valley Bank in Cavalier, N.D., expects a jump of at least 10%.
"As we sit here today in 2008, it is a very, very exciting time in agriculture," said Barry Hanson, a senior vice president at the $140 million-asset United Valley.
Bankers say farmers are borrowing more mainly because their own costs — for seed, fertilizer, and fuel to run their equipment — have increased substantially in the last year. But bankers say they are more than comfortable making these larger loans, because farmers are fetching top dollar for their crops.
In the last two years prices for such crops as corn, wheat, and soybeans have doubled or even tripled, in large part because of the ethanol boom and a steadily weakening dollar, which has fueled a surge in exports. Corn, which is used to make ethanol, was selling this week for about $5.64 a bushel, up from about $2.28 two years ago, according to the Chicago Board of Trade.
The higher prices may be bad news for consumers, but they have helped generate hefty profits for farmers, many of whom are looking to buy more land to plant even more crops.
Indeed, perhaps the only thing that could hold farmers back from borrowing more is their own liquidity. Some farmers are so cash-rich these days that they might not even need loans to finance seasonal operations, or even future expansion, said John Blanchfield, director of the American Bankers Association's Center for Agriculture and Rural Banking.
"It's about as good of an environment for agriculture as there has ever been," Mr. Blanchfield said. But, he said: "Farmers are also as liquid as they have ever been. That may mean reduced loan demand."
Still, all in all now is a good time to be an agricultural lender.
The Federal Deposit Insurance Corp. defines agricultural banks as those with agricultural loans plus real estate loans secured by farmland that exceed 25% of total loans. According to the FDIC's most recent Quarterly Banking Profile, this class of roughly 1,600 banks reported an 8% year-over-year increase in fourth-quarter profits, to $424 million. No other class of banks — including those defined as credit card banks, mortgage lenders, consumer lenders and commercial lenders — reported a year-over-year increase, and profits for the banking industry as a whole fell 83%, to $5.8 billion.
Credit quality, too, was stronger at agricultural banks. With crop prices at their highest levels in years, farmers had little trouble paying off their credit lines. The result: net chargeoffs at agricultural banks were 0.31% of loans in the fourth quarter, up just 3 basis points from the fourth quarter of 2006. By comparison, net chargeoffs for the entire industry rose 37 basis points from a year earlier, to 0.83% of loans.
Large banking companies that make farm loans but are not defined as agricultural banks — including Wells Fargo & Co. and BNP Paribas' Bank of the West — are also ramping up their lending.
At the $62 billion-asset Bank of the West, in San Francisco, the volume of agricultural loans has increased by 50% in the last two years, and chief executive J. Michael Shepherd said he expects the growth trend to continue.
"We've had solid and steady growth in" agricultural lending "and I don't see any reason that will change," Mr. Shepherd said in an interview last week.
John Stumpf, Wells Fargo's CEO, said agriculture lending in California and across the Midwest is a consistently growing area of business as farmers and agricultural businesses reinvest their healthy profits in farmland and machinery.
"Agriculture is very strong right now," Mr. Stumpf said in an interview last week. "Prices have never been better."
Jeff Greenlee, president of NBanC's Altus, Okla., region, said his agricultural customers, mainly cotton growers, are expected to increase their borrowing because their cost of doing business is increasing. They are spending more money, but they are also making more.
"We have got guys that are going to have to borrow a lot more than they did in the past," Mr. Greenlee said. "It's not financial weakness, just a different operating environment."
Still, while the increase in commodity prices has been a boon to farmers, it has been a hardship for the likes of cattle feeders. Rising corn prices means feeders are paying more to fatten up cattle, and that is affecting their cash flow.
Mike Jacobson, the president and CEO of the $205 million-asset NebraskaLand National Bank in North Platte, said he expects loans to feeders to decrease as more exit the business due to rising costs, adding that banks risk potential loan losses if they stay with cattle feeders too long.
Bankers say they also need to be wary of escalating real estate prices. United Valley's Mr. Hanson said land values have nearly doubled in the last year in some areas, and that has dramatically increased operating costs for farmers who rent land for planting crops.
Crop prices may be high now, he said, but when making a loan decision he has to factor in whether a farmer can meet his rent payments if crop prices fall.
"That creates pressures for me that I never thought I'd have to deal with," Mr. Hanson said.
