No shortage of funds, but standards tight
Credit is likely to stay cheap in the near term, whether you’re in the market for farmland or equipment. In 2011, farm banks increased lending by 5.6%, or by $3.8 billion, even though farmers overall had record income, according to a recent study of the nation’s farm banks by the American Bankers Association (ABA). That’s the good news. The bad news is that cheap money and volumes of it only apply to the most credit-worthy customers.
A credit-worthy borrower controls risk using various marketing tools and management strategies, says Bruce Everhart, vice president of Wells Fargo Bank in Ft. Wayne, Ind. That includes knowing their financial statement inside and out, using crop insurance and maintaining low debt. Communication is important, too.
Lending Snapshot. An upswing in farm lending can be attributed to a couple of key reasons, says John Blanchfield, director of ABA’s Center for Agricultural and Rural Banking. First, repayment ability has increased, so farmers are upgrading equipment. Second, farmers are taking advantage of low fixed rates to expand.
Nationwide, production loans increased by 6% in 2011, while farmland loans grew at a more modest 5.3%. "Farmers are more likely to use working capital—which they had more of in 2011—for real estate purchases," Blanchfield says. "They are more comfortable using borrowed funds for skyrocketing input costs."
Farm loan activity varies substantially by region. Corn Belt farmers increased borrowing from ag banks by 6.6%, followed by the Northeast, up 6.5% from 2010; the West, up 5.7%; and the Plains region, up 5.3%. Southern producers increased their borrowing the least, at 4.3%.
Bank Returns. Like their customers, farm banks had strong profits in 2011. "Pre-tax [bank] income rose 25.3%, while equity capital increased to $40.4 billion and asset quality continued to improve," the ABA report says.
While loan demand is on the rise, the supply of lendable funds far exceeds demand, largely due to the strength of the ag economy. For instance, the loan-to-deposit ratio at ag banks has fallen from 84% in 2008 to 72% in 2011.
In spite of the drought, bankers are looking at solid returns this year. The drought will impact producers, particularly those without crop insurance, which constitute about 20% of Everhart’s customers. That said, his farm clients’ portfolios are significantly stronger than in the previous drought years of 1983 and 1988. For some producers, his bank is willing to set aside a portion of their debt providing they have a plan to pay it back, and the producer has a plan to mitigate risk moving forward.