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Stress in ag causes some problems in lending

Challenges in agriculture, including low prices and some bad growing seasons, have led to some farmers facing problems getting loans, though some in the ag industry are optimistic they will see things improve.

Frayne Olson, a crop economist with North Dakota State University, said there are some isolated instances of farmers being turned away for operational loans. When it comes to approving a loan, banks look at the farmer's ability to generate enough revenue to pay back the loan and the value of the collateral being put up.

"They need a repayment margin," Olson said.

The problem with the cash flow on the production side of things is that it's dependent on a number of issues outside of a farmer's control, including commodity prices and weather.

This makes it harder to predict and increases risk when prices are low.

On the collateral side, Olson said a chain of events has led capital values to fall considerably this year.

From 2011 to 2014, farmers' profit margins were hitting record highs. With lots of money coming in, farmers often invested in new machinery.

Equipment breakdowns stop production and can be very costly, especially at harvest.

Now that profit margins are lower, growers are holding onto equipment longer. This means implement dealers have lots full of slightly used equipment and fewer farmers buying new.

In this high-supply, low-demand situation, values are falling.

"The banks recognize that," Olson said.

Add falling land values, and a farmer's collateral value can come up considerably lower.

When a bank looks at these two factors, a farmer may be denied a loan, depending on a multitude of circumstances.

"The math isn't working very well," Olson said.

Optimism

Some other factors are coming together to prevent a widespread trend.

At the forefront are the record-high yields farmers experienced this past growing season. Though commodity prices were low, the bushels were way up in most areas.

"Overall, things have been good, and we're working with producers," said Rick Clayburgh, president of the North Dakota Bankers Association.

Like many people in business, Clayburgh is spending quite a bit of time in Bismarck these days for the legislative sessions, where he encounters people from throughout the agriculture industry.

He said there are a number of challenges right now, but the overall tone in the industry is one of optimism.

Todd Steinwand, chief business development officer with the Bank of North Dakota, said he's not seeing a lot of loan denials.

And he said collateral values are not having a huge impact on lending trends.

He said the low commodity prices have left cashflows tight, which is a problem, but it's not having a widespread impact on lending, largely because of the mitigating factor of last season's high yields.

The exception to this is the northeast part of the state, where too much moisture forced yields lower. For some of those farmers, banks will deny a loan.

"This is very general. There's exceptions," Steinwand said.

What if

"We've always seen the ag sector goes through cycles," Steinwand said, adding there's nothing particularly catastrophic about the current downturn.

If low commodity prices continued, which isn't expected, or if there was a serious, widespread weather event, then the industry could see a large problem next year.

Olson of NDSU said lending in small-town banks often is entirely related to agriculture.

"If you don't loan to farmers, you don't do a lot of loans," Olson said.

Dodd-Frank regulations, meant to stop banks from risky practices that put their customers' money in peril, put strict regulations on lending practices.

When auditors review a bank's lending practices, they review its policies to see if they're sound and consistently followed.

They then do a "stress test," which is a what-if scenario to see how a situation, such as ongoing low commodity prices, would play out with the bank's finances.

If the bank's practices look too risky, it can run afoul of the regulatory limits.

Olson said when a bank depends on agricultural loans, it has to balance the desire to serve its customers with these regulations.

"If you're a loan officer, you're caught between a rock and hard place," Olson said.

For the time being, it doesn't appear the worst cases are going to pan out, barring some unforeseen weather or unusual economic events.

John Swanson is a board member of the Minnesota Corn Growers Association. His district covers the northwest part of the state, which includes some of the areas hit last year by too much moisture and lower yields than were seen across much of North Dakota.

He said he hasn't heard of anyone being denied operational loans in the district, and he said farmers are looking forward to a successful growing season this year.

"There's some degree of optimism, Swanson said.

Kevin Killough

Kevin Killough is the business reporter for the Grand Forks Herald. You can reach him with story tips, comments and ideas at 701-780-1244.