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Farm loan repayment rates down, collateral demand up


CHICAGO, Ill. — Agricultural credit conditions have decayed in recent quarters, with loan repayment rates down, loan demand on the rise, and some lenders requiring increased collateral, according to reports from Federal Reserve banks in Chicago and Minneapolis.

In the first quarter of this year, 50 percent of bankers questioned by the Chicago Fed said they had observed lower repayment rates for non-real estate farm loans relative to the first quarter of 2018, said David Oppedahl, senior business economist. Two percent saw higher repayment rates.

The Chicago Fed serves all or parts of five states, including Illinois, Indiana, Iowa, and Michigan.

“Credit tightening also continued in the first quarter of 2019,” he explained. “Twenty-eight percent of survey respondents noted that their banks required larger amounts of collateral for loans during the January through March period of 2019 relative to the same period of 2018, while none noted that their banks required smaller amounts.”

Demand for loans rose during the first quarter. Forty-nine percent of bankers surveyed saw higher demand compared with a year ago; 8 percent saw lower demand, Oppedahl said.

The Minneapolis Fed reported demand for loans rose slightly in the first quarter, driven by falling incomes. About 41 percent of lenders reported an increase in loan demand, while 47 percent saw no change, the bank said in May.

As for loan repayments, 35 percent of respondents saw a decrease, while 62 percent saw no change in repayment rates. The Minneapolis Fed serves six states, including part of Michigan.

Alejandro Plastina, an assistant professor in Iowa State University’s Department of Economics, recently attended a gathering of farm lenders in Iowa. “Farmers are having more problems paying back loans,” he noted. “Banks in general are saying 25 to 35 percent of farm loans face some probability of late payments.

“The expectation is that repayment rates are declining and will continue to decline. Since 2014, there have been declining repayment rates. It has been worse; in 2016 and 2017, repayment rates were lower than what they are today.”

In the 1980s, agricultural loans were based mostly on equity, but today, lenders focus on cash flow, Plastina pointed out.

“Farmers have more equity now than in the 1980s,” he said. “Still, banks are not willing to go back to lending based on equity. Loans are based on profits rather than existing equity.”

Loan requirements have increased for three straight years. “It makes sense. It’s becoming more risky to finance farm operations, requiring higher collateral for the same amount of loan.”

Farmers who find themselves unable to repay a loan should know how to calculate their break-even prices, he said. “Know your cost structure. Try to reduce costs as much as possible. Make informed decisions on when to market your crops.”

Producers should look at family living expenses for ways to cut back. They should also use their assets to generate other revenue, he said. For example, they could use a tractor and blade for snow removal. Plastina recommended meeting with an extension agent or crop consultant regarding a production plan and talking early with a lender if there’s a problem.

Steve Allard, chief credit officer with Farm Credit Mid-America, said about 1 percent of his company’s loans are past due.

“There is some seasonality to that,” he noted. “We feel very good about it. We haven’t changed our underwriting standards. With land values holding steady, there’s not a need for a lot of change in collateral.”

With the decline in working capital in parts of the country, some farmers are borrowing for the first time or for the first time in a long time, Allard said. “From a lender standpoint, we look at the cash flow and the ability to pay off debt. We’re looking for results that play to favorable outcomes for everybody.

“All lenders have the desire to serve customers. We want constructive lending. Providing more debt that one can’t pay back is not constructive, in our view.”

Allard said farmers should remember it may take time to reach a solution if a producer is finding it difficult to repay a loan. Farm Credit Mid-America has about 80,000 customers in Indiana, Kentucky, Ohio, and Tennessee.

Michigan farmers see relief

The Michigan Farm Bureau supports a measure passed last week designed to provide some loan relief to farmers hampered by excessive rain. Under state House Bill 4234, $15 million would be supplied to lending institutions and be available to farmers as interest rate reductions through the Agricultural Disaster Loan Origination Program.

“Farming is facing uncertainty that we haven’t seen in years,” said Carl Bednarski, Michigan Farm Bureau president. “It’s humbling to see the legislature understand what’s happening and be willing to step up to the plate for our industry, and we are grateful for their support and fast action.”

The Farm Bureau expects Gov. Gretchen Whitmer to sign the bill. Once it is signed, farmers should contact their lending institution for further information.