The supervision department of the Federal Reserve Bank of Minneapolis conducts an annual survey of state member banks (SMBs) with agricultural loan concentrations. We ask presidents or senior agricultural loan officers at agriculturally focused SMBs about borrower financial conditions, bank underwriting practices, farmland values and other factors affecting the agricultural economy. This article summarizes the survey results and outlines practical steps bankers can take to manage borrowers with carryover debt.
We found that many agricultural producers struggled to break even in 2016, but bankers have been able to work effectively with most of their weaker borrowers. Bankers indicated that agricultural conditions remain challenging for crop producers because of low commodity prices and that livestock producers had mixed results. These are the key takeaways from the survey responses:
- 41 percent of bankers surveyed indicated that their typical borrower was below breakeven in 2016, and 96 percent anticipate some level of carryover debt in their agricultural portfolios.
- 56 percent of bankers indicated that operating loan demand continued to increase over the past year.
- 78 percent of bankers noted a decline in farmland values during 2016, with 15 percent reporting declines of 25 percent or more.
Most bankers surveyed anticipated some level of carryover debt in their agricultural portfolio following the 2016 operating cycle. Approximately half of the respondents anticipated carryover to be less than 10 percent of the portfolio by dollar volume. Other bankers surveyed anticipated greater amounts of carryover debt, frequently in the 20 percent to 40 percent range. With all major agricultural sectors in the District experiencing stress, banks reported struggling borrowers across the District. However, with high yields partially offsetting low prices in most areas, the areas without high yields (such as southwestern North Dakota) experienced the most stress.
Bankers indicated that multiple years of tight cash flow have led producers to draw down their accumulated working capital and depend more on their credit lines for operating expenses. As a result, 85 percent of bankers surveyed indicated an increased or stable operating loan demand in 2016. The 15 percent of banks reporting a decreased demand for operating funds were primarily in the northern regions of the District, which produce more diverse crops.
Generally, bankers reported declining farmland values and few transactions. Nearly 80 percent of the banks reported declining land prices. The 22 percent of bankers reporting stable farmland values operate in areas concentrated in dairy production or in cattle production areas of Montana that did not see significant increases in land prices during the peak.
Responses to challenges and ways to manage carryover debt
A major challenge in handling the current issues facing agricultural lending is managing borrowers with carryover debt. Most bankers stated that they are willing to term out carryover debt where prudent and obtain additional collateral, usually farmland. Other alternatives bankers discussed for problem borrowers included selling assets to reduce their debt levels and lower operating costs, and encouraging borrowers to seek additional off-farm income. Many bankers indicated that they are also using government guarantees, most commonly through the USDA’s Farm Service Agency. Many bankers indicated that they have government guarantees on 5 percent to 10 percent of the agricultural portfolio, but much higher percentages are also common. In a few cases, bankers discussed using liquidation as a last resort for their weakest borrowers, with just over 10 percent of bankers indicating that they had cut off credit for some borrowers.
While carryover debt resulting from insufficient cash flow can reflect a well‐defined credit weakness, there are other factors to consider when risk rating borrowers.1 In order to fully assess the borrower, first analyze the fundamental causes of the carryover debt (e.g., crop prices, a poor marketing plan). Second, use existing budgeting processes to assess the viability of the borrower’s operations. Finally, ensure that the structure of the carryover debt is appropriate. Appropriate structure generally means the loan has clearly identifiable collateral and a reasonable amortization period, and the borrower will be able to afford the payments based on realistic expectations. Carryover debt can often be risk rated “pass” so long as loans are adequately collateralized and appropriately serviced, and the borrower’s long-term financial condition is sound and within the bank’s policy limits.