Non-Performing Ag Loans Increase, Says Lender Survey

Agricultural lenders are reporting increases in non-performing farms loans and decreased farmland values, according to the latest Agricultural Lender Survey conducted by the Kansas State University Department of Agricultural Economics.

Lenders reported that over the past three months, total farm dollar volume rose and is expected to increase in the short- and long-term for all categories. However, the low commodity prices and rising input costs that have driven volume increases also have some respondents concerned about the financial health of farmers in the future, according to the survey, conducted in March and released June 4.

“Researchers pointed to uncertainty in the markets regarding interest rates and competition amongst the lenders as some of the long-term factors in the results, which still showed a strong credit market for producers,” according to the university’s summary of the results. “Lenders cited lower commodity prices, rising operating costs and the softening of cash rents. Combining these with a decrease in farmland prices created concern in the long-term financial health of the farming sector.”

The survey included 39 lenders with an estimated total agricultural loan volume of $26 billion and ranging in size from $10 million in ag loans to $9 billion.  Respondents’ primary service territories were throughout the U.S., although more than half came from the Plains region.

“For the first time in the survey, respondents indicated an increase in non-performing loans with 6 [percent] of respondents indicating an increase,” researchers said. “Expectations for non-performing loans continue to increase in both the short- and long-term for all categories.”

Even so, respondents “did not seem too concerned for the agricultural sector in the long run,” the report said. “One respondent noted that ‘distressed operations may liquidate under-used items to bolster liquidity.’”

Allen Featherstone, professor and department head of the K-State Department of Agricultural Economics, said the increase in non-performing loans reflects that the market is just cycling back to a normal state.

Bankers are still interested in agricultural investments, but farmers will need to show a strong investment plan as lenders manage risk, the researchers said.

“Producers are going to encounter cautious lenders,” Featherstone said. “Farmers will have to be well-prepared and document plans going forward to continue to access credit at good rates.”

Respondents reported that the spread over cost of funds (the difference between the loan interest rates charged by the lender and the interest rate paid by the financial institution for the funds deployed) decreased over the past three months. A decrease can suggest competition among lenders may be increasing, but the spread is expected to increase longer term, the report said.

Earlier this year, the Federal Reserve Bank of Kansas City reported that non-real estate bank loans made to farmers in the first quarter grew by nearly 8 percent. The increased ag lending was driven by higher borrowing for current operating expenses and livestock purchases.

Federal regulators have noted that changes in commodity prices and production levels come with the territory for agricultural lenders. Adhering to prudent lending practices and regulatory guidance can help manage losses, according to the Office of the Comptroller of the Currency, or OCC.

“Prudent Ag loan underwriting requires lenders to have a thorough understanding of the borrower’s operating environment and cash flow,” the Comptroller’s Handbook on agricultural lending says. “A global assessment of Ag borrower cash flow and repayment ability is often appropriate and necessary.”

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