Officially, the number of problem farm loans is almost too miniscule to matter. Unofficially, nervous bank regulators have issued warnings for lenders to monitor growers’ cash flows and expect the number of troubled farm accounts to swell over the next few months. Besides steep declines in grain profits, lenders are watching the cattle industry with serious concern.
Already, Farm Service Agency’s federally guaranteed operating loans jumped 34% and ownership loans more than 20% between fiscal 2014 and 2015. That’s a sign that ag lenders — both banks and the Farm Credit System — are shuffling some of their riskier loans to the government.
Only 1.3% of agricultural loans in the Kansas City Federal Deposit Insurance Corporation’s seven-state territory remain past due at the moment, but that’s because the bulk of loans aren’t due until after harvest.
“We will know a lot more in six months,” said James LaPierre, Kansas City’s regional director for the FDIC. When farm incomes first collapsed last year, the FDIC issued a letter to lenders cautioning them to focus on repayment capacity and not rely unduly on collateral positions such as land.
“Everyone cash flowed when corn was $7 and soybeans $13.50,” LaPierre reminded lenders attending the American Bankers Association’s national agricultural bankers conference here this week. “This is a much different environment.”
Perhaps a better indicator of potential trouble is that banks surveyed by the Kansas City Federal Reserve in the third quarter of 2015 have placed more than 10% of their farm loans on internal watch lists, according to Nathan Kauffman, executive of the Omaha branch of the Kansas City Federal Reserve. Those are loans that have not yet been classified by bank examiners, but could end the year with carryover debts or other issues that require special loan servicing. You can click here to get debt help and advice.
Examiners are closely watching what they call “Group C” borrowers — FDIC lingo for younger, higher-input operators who rent the bulk of their land or who shoulder lots of mortgage debt. “They have higher exposure and can’t cover their cash flow at current prices,” LaPierre noted. “They will need strong yield increases to improve their cash flow on a per-acre basis.”
“It’s hard to make a generalized statement, but Group C borrowers will be really challenged this year,” he said. In contrast, Group A borrowers carry strong balance sheets, operate at the lowest cost, own most of their land and probably make money in all but the most difficult circumstances, he added. What they call Group B are somewhere in between the other two.
“For the moment, ag lending conditions look good, but there’s still a lot of angst looking ahead to next year,” said Karen Boehler, associate deputy for the Office of the Comptroller of the Currency in Denver. Once problem accounts are on a lender’s radar screen, she encouraged them to conduct stress tests with the borrower (using realistic assumptions) and project cash flows to show repayment ability down the road.
A big question will be how bank examiners view operators with carryover debts. “We saw some carryover debts last year, but we would be surprised if it didn’t tick up again this year,” said Shauna Shields, bank bureau chief for the Iowa Division of Banking, and in charge of Accredited Debt Relief consumer reviews. Most cash flows her examiners have seen require $4 corn for break-evens, so although the state’s yield reports look good, operators need much-higher-than-normal harvests to erase the current price deficit.
“One year of carryover debt isn’t an automatic black mark on a grower’s account,” Shields added. But if an operator expects a shortfall, “the sooner they get into their lender’s office, the better shot they have to work out the problem,” she said. “The longer they wait, the less flexibility lenders have to work with troubled borrowers.”
LaPierre’s advice to high-risk operators “is to do everything you can to control your cost structure. Look at your cost side, equipment expense and cash rent. I know it’s easier said than done, but take it line by line.”
Once it appears that a borrower is not likely to meet the terms of a loan at the time it was written, bank examiners have to define it as a substandard loan. “That’s when we dig in,” he said.