So far this year farmers plagued by the now five-year drought throughout the West and the Great Plains have done a better job paying back their loans than they did last year.
But if long-awaited rains do not come soon to ensure a good harvest this fall, problem loans may begin to rise again for the banks that serve these farmers.
Past-due loan ratios at farm banks in the most drought-stricken areas peaked at 8.21% in March 2003 but dropped to 6.25% a year later, according to a June 30 Federal Deposit Insurance Corp. report. The FDIC defines farm banks as those that have 25% or more of their portfolios in agricultural loans.
John M. Anderlik, the Kansas City regional manager for the FDIC's division of insurance and research, says farmers are paying their loans back more regularly because commodity prices generally have increased. Moreover, the federal government has given many farmers more financial aid to make up for the drought and other natural disasters of the two past years.
However, if the drought continues through the fall, farmers in the worst areas may again get stretched too thin and fall behind on their loans, Mr. Anderlik said.
Banks in areas of persistent drought had better past-due ratios this year, but the figures are still much higher than those for farm banks in areas largely unaffected by drought. In March 2004 those banks had an average past-due ratio of 3.44%; a year earlier their average ratio was 4.3%. (The average for all FDIC institutions was 1.02% in March 2004 and 1.31% in March 2003.)
According to the U.S. Drought Monitor, a service of the National Drought Mitigation Center at the University of Nebraska-Lincoln, rainfall is expected to be above normal over the next two weeks from the northern Plains to the Pacific Northwest, and regions south of that should get some relief, too. However, in many areas - particularly the most drought-stricken ones - rainfall in the last few weeks had been spotty.
"The next few weeks are going to be critical," Mr. Anderlik said. "If timely rains don't materialize and we don't get decent crops, then we could see problems."
Eastern Wyoming is one of the most severe drought areas. So far this year 4.6 inches of rain had fallen there as of July 1 - about half the area's average, says Frank Rotellini, the Wyoming division president of the $3.8 billion-asset First Interstate Bank in Billings, Mont.
"While many of our hay farmers will be able to get up to $100 a ton - the top end in prices - many of them are maxed out on their lines of credit," Mr. Rotellini said. "If we don't get the rainfall that we need," and crop yields are much lower than expected, "it would be a difficult situation for them."
First Interstate, the largest ag lender in eastern Wyoming, has had very little loan growth in that sector this year, but it has diversified into other types of lending in Wyoming that are not weather-dependent. In particular, it is serving the natural gas and mineral mining firms that are moving into the eastern part of the state, as well as their employees.
Additionally, more retired or semi-retired people are fleeing the crowded West Coast to the less-populated, less-expensive area, and housing construction is on the rise.
Southern Idaho is another region experiencing severe drought conditions. Isolated thunderstorms are forecast for the next several weeks, but that might not be enough to offset the drought's cumulative effects, says Ronald L. Brown, the president and chief executive officer at the $293 million-asset Farmers National Bank of Buhl.
"A lot of our farmers" are being denied access by the state "to some of the rivers and reservoirs, because the water is running out," he said. "We've kind of made provisions with the growers, and they are doing the best they can by planting grain crops that use less water," though the crops generate less income than those that use more water, such as potatoes and sugar beets.
About 55% of Farmers National's loan portfolio is ag-related, and according to the FDIC, the ratio of past-due "other" loans (including agricultural ones) was 5.02% as of March 31, compared with 0.16% a year earlier. Mr. Brown said most of the past-due loans were for reasons other than the drought. For example, one loan for about $5 million was not ag-related but was included in the FDIC's "other" category.
The overall past-due ratio was 1.98% on March 31, versus 0.43% a year earlier.
Farmers National's dairy customers further east in Idaho soon may not be able to use another dwindling water source, the Snake River Plain Aquifer, because trout farmers are claiming they have senior rights to it.
Mr. Brown said that the state brokered a settlement last year between the trout and dairy farmers that gives both of them access to the aquifer, but the trout industry has since filed lawsuits that would make the settlement void. If that happens, dairy farmers may have to shut down.
In southwestern Utah, isolated thunderstorms are forecast for the next several weeks. However, persistent drought conditions have been exacerbated by a drop in electricity generation by two large dams on the Colorado River, the Hoover Dam and the Glen Canyon Dam.
According to the U.S. Bureau of Reclamation, if the drought continues for several more years, electricity generation at these dams may stop entirely, so local businesses would have buy electricity from elsewhere and, quite likely, pay more for it.
Because of the drought, the $355 million-asset State Bank of Southern Utah has had to deal with some problem loans to both farmers and businesses that cater to tourists of the area's surrounding national parks. Over all, though, the Cedar City bank's past-due ratio was 1.19% as of March 31, compared with 1.91% a year earlier, according to the FDIC.
"We'd definitely be impacted if the Glen Canyon Dam quits generating power," said Ronald W. Heaton, State Bank's president and CEO. "All of the power for our municipalities here comes from the dam, and we have a lot of customers who would be quite devastated if power rates go up."
