Poor agricultural conditions in the Ninth District due to low prices
and crop disease pose a risk not just to farmers but also to the
banks that lend them money. Banks with a concentration of loans
to agricultural producers are, of course, particularly vulnerable,
and a significant portion of banks in the Ninth District face such
exposure. Adding to the current concern is the latest survey
of agricultural bankers by the Minneapolis Fed, which reflects
a decidedly downbeat tone.
However, the financial data from Ninth District banks to date
indicate that agricultural banks are generally still in good condition.
There is some variation in the district, with North Dakota agricultural
banks reporting a recent drop in profitability and asset quality,
while agricultural banks in Minnesota continue to outperform district
banks as a whole. These data are certainly not the final word, both
because it reports past conditions (as opposed to the survey, which
asked about future conditions), and because continued low prices
or poor weather could worsen farmers' ability to repay their lenders.
As such, regulators are paying particular attention to how banks
continue to manage their exposure to agricultural conditions.
Poor agricultural conditionsan overview
Ninth District farmers producing major crops such as corn, wheat
and soybeans currently face historically low prices. Additionally,
cattle and hog prices have fallen to very low levels. For both crops
and livestock, global output is large relative to global demand,
which is depressed, in part, by reduced household incomes in Asia.
Scab, a plant disease affecting wheat and other small grains,
has made matters worse for many farmers in North Dakota and northwestern
Minnesota. This disease has reduced both crop yield and quality
repeatedly in the 1990s.
Adverse prices have reduced incomes throughout the Ninth District
and across the country. Farm income in North Dakota, for example,
is low not only in comparison to record levels achieved in 1996,
but to the average for the entire decade.
The reduced income available to farmers poses a threat to banks
that finance agricultural production and farm real estate. How exposed
are banks in the Ninth District to the fortunes of the agricultural
Exposure of Ninth District banks to agriculture
Perhaps the most direct way to measure the exposure of banks to
agricultural production is the percentage of their loan portfolios
made to farmers. The table on this page provides such a breakdown.
It may be useful to know that regulators, under a commonly used
rule of thumb, consider any bank with at least 25 percent of its
loans extended to the agricultural sector to be an agriculturally
focused lending institution (an "agricultural bank"). By this standard,
the table indicates that over half of all banks in the Ninth District
are agriculturally focused. Only one other Federal Reserve District,
Kansas City, has a similar concentration. Agricultural banks are
a particularly large part of the bank population in the Dakotas,
where they make up about 80 percent of all banks. A significant
number of banks in the district are even more agriculturally dependent
than the agricultural bank standard: One-third of all banks in the
district have over half of their total loans extended to agricultural
And these banks and others are probably even more dependent on
agriculture than these numbers suggest. Banks in rural areas also
make loans to small firmsranging from the town hardware store
to the local grain elevatorthat depend on the health of the
agricultural sectors for their own economic well-being. As a result,
agricultural banks are probably even less diversified than their
direct agriculture exposure suggests.
While agricultural loans are clearly important to a large number
of Ninth District banks, it is important not to overstate their
importance to the district banking sector as a whole. Indeed, as
of second quarter 1998, agricultural loans made up only about 9
percent of total district loans. How can agricultural loans be so
important to so many banks but not to the entire banking sector?
Although most of the banks in the Ninth District are small and many
of these small banks are agriculturally focused, most of the banking
assets of the Ninth District are controlled by very large banks,
particularly in Minnesota, that have a relatively small percentage
of their portfolios in agricultural lending.
Profitability and asset quality of agricultural banks
Despite their high dependence on the agricultural sector, profitability
in the district's agricultural banks as a whole has been consistent
with or exceeded profitability of all district banks during the
1990s. And, this same trend has held more recently as well. In the
second quarter of 1998, return on average assets (ROAA, the most
common measure of bank profitability) in the district's agricultural
banks exceeded the district average. The level of loan losses in
agricultural banks has been consistent with district averages over
this same period.
Not all agricultural banks in the district have performed equally
well, with some institutions potentially showing more of an effect
from recent poor conditions. For example, in contrast to previous
years in the 1990s and perhaps reflecting current, poor agricultural
performance, the profitability of agricultural banks in North Dakota
has fallen below the district average for all banks, by about 10
percent. This may reflect that North Dakota farmers have been hardest
hit by low prices and crop disease.
Why might this data not be as gloomy as the Fed survey of agricultural
banks? The financial data analyzed in this article is reported by
banks on a quarterly basis. It reflects the bank's most recent past
experience, the second quarter of 1998, but does not-necessarily
indicate how the bank will perform in the future. Indeed, bank losses
and bank failures in particular, tend to increase or decrease in
a "lumpy" fashion. That is, rather than increasing or decreasing
in a smooth trend, these figures can move up or down by significant
In contrast, the Fed survey asks bankers for their impressions
of the future and is based on a more current periodthird quarter
1998. The weakness with a survey, however, is that it does not provide
hard data on how the surveyed banks are actually performing, nor
does it have the same extensive coverage of banks that the financial
reports provide. Thus, both types of reports need to be reviewed
by observers of banking conditions.
A lack of diversification among many banks in the district leaves
them vulnerable to a downturn in the agricultural sector. As a result,
bank regulators at the Federal Reserve bank and elsewhere pay particularly
close attention to agricultural portfolios of these banks when conducting
examinations, and to the performance data reviewed in this article
as part of regulatory off-site monitoring. Such intensive efforts
will certainly increase if poor agricultural conditions continue
|NINTH DISTRICT AG LENDING
|Ag Loans as a Percent of All Loans
||Percent of District Banks
||Average Assets in Millions of Dollars