Banking in the Ninth

Agricultural Bank Survey (2012)

Safety and Soundness Update - June 2012

Published June 1, 2012  | June 2012 issue

Annually, the Reserve Bank conducts a survey of state member banks whose loan portfolios are concentrated in agricultural lending1 to gauge their views of agricultural conditions and agricultural credit markets. The survey, conducted in January and February, included contacts with representatives of 39 institutions. Overall, the results of the 2012 survey are consistent with last year’s survey. In the survey, we ask about three distinct areas: general outlook, credit market conditions, and risk management. We also looked at whether examination results over the past year are consistent with the respondent’s observations.

General Outlook

Of the surveyed bankers, 36 had a generally positive outlook for their agricultural customers, with the other three having a negative outlook. Most bankers indicated the demand for agricultural loans, including agricultural real estate loans, was stable or decreasing; 23 percent indicated that demand was increasing. The majority of bankers (67 percent) indicated land prices continue to increase. These results are largely unchanged from our 2011 survey, although more bankers noted decreasing loan demand as opposed to stable demand in 2012.

Credit Market Conditions

When asked for their views on issues related to agricultural operating loans, some respondents noted strong borrower cash incomes have changed practices regarding use of these lines. Often, lines are being drawn near year-end for tax purposes and repaid early the following year. In prior years, draws were typically taken early in the year with loans repaid at year-end using crop sale proceeds. With respect to agricultural real estate lending, bankers noted there are few farm real estate transactions in most areas, thereby increasing demand when parcels come up for sale. Respondents noted most sales are to local buyers and often funded with cash. In response to elevated commodity prices, the movement of production land to recreational purposes has all but ceased, and bankers noted more borrowers with land in the Conservation Reserve Program are considering returning the land to production. Bankers noted fierce competition for those real estate loans that are being made and expressed concern that competitors’ loan terms are potentially helping drive up land values.

Risk Management

We also asked banks about the risk management techniques they are using to mitigate risks associated with current high commodity prices and land values. Responses reflected that the vast majority are using a variety of techniques to mitigate risk. Bankers frequently stated, “We remember the ’80s” when responding to these questions. Risk management techniques in use included:

  • Setting a maximum lendable amount per acre or using commodity price assumptions well below current prices when evaluating loan requests;
  • Requiring significant down payments or taking additional collateral on real estate loans;
  • Performing break-even analysis on operating credits; and
  • Requiring purchase of multi-peril crop insurance.

These mitigations, together with the fact that many borrowers have reduced debt, purchased real estate with limited leverage, or upgraded equipment while improving liquidity and net worth, lead our respondents to conclude that most borrowers are well positioned for a decline in market prices over the near term. Longer term, most anticipate a correction in commodities prices and are concerned about the impact of high input costs.

Examination Results SupportĀ Respondent Observations

We also reviewed examination and financial data for Ninth District state member banks comparing those concentrated in agriculture to those not so concentrated. Overall, conditions are improving at agricultural banks as with other banks. At agricultural banks that are in less-than-satisfactory condition, weaknesses in agricultural loan credit administration or quality are rarely responsible for the problem condition. Rather, the bank’s decision to expand lending outside its traditional area of expertise, often by purchasing out-of-territory commercial real estate loans, was usually the cause of deterioration.


1 Banks with agricultural loans exceeding either 100 percent of tier one capital plus the allowance for loan and lease losses or 25 percent of total loans.