I was a lot more positive about the farm economy at the beginning of 2017 than I am this year. Every projection I have seen for 2018 says this year is going to look a lot like last year, which means for many farmers, 2018 will be the fifth year in a row of poor or negative earnings. For community banks that lend to farmers and ranchers, this will be a very challenging year.
I speak at many bank-sponsored farmer education events and increasingly the buzz among the farmers in attendance is negative about 2018 farm income prospects. A large number of farmers are still processing what happened to their strong economy and how change happened so fast. Today, many producers are looking for a weather or other catastrophic event in some other part of the world that will push U.S. commodity prices higher. Absent such an event, 2018 is going to be challenging in farm country.
By far I am not the only one who believes the farm economy may be poised at the edge of a deep chasm. On Dec. 14, 2017 the Omaha-based federal Farm Credit Services of America sent a letter to a number of its customers advising them they could defer their principal payments on real estate secured loans for the entirety of 2018. This was either an amazing public relations stunt, or a stunning acknowledgement by the management of the largest federal Farm Credit lender in the country (some 50,000 “borrower-members”) that there are severe repayment problems in their farm loan portfolio. I believe the latter to be true. Thanks to the lack of transparency within the federal Farm Credit System, the public has no way of knowing how many customers got the letter, but I believe it was a significant number.
Welcome to the “push-pull” farm economy. Bankers who lend to farmers and ranchers will spend a lot of 2018 working with (controlling?) their “push” customers, who fortunately are still the overwhelming majority of bank farm loan customers. Some of these customers believe there is great opportunity in this depressed farm economy and want to push rapidly ahead (using money borrowed from the bank).
A much smaller number of customers will consume massive amounts of time, attention and resources as they “pull” their bankers into a vortex of financial instability, continued refinancings, reorganizations and liquidations. While these customers still constitute a tiny minority in any bank’s farm loan portfolio, they will tie up enormous resources unless a process is developed to confront their problems quickly and efficiently. This is easy to say; figuring out how to implement such a quick and efficient process will be enormously difficult for any bank.
The push-pull farm economy demands that bankers rethink and reject some of the “undeniable truths” that the great farm economy boom of the early 21st Century engendered. My short list of questionable ag lending “facts” that need to be re-examined in light of our current farm economic reality includes:
- Farm real estate values cannot go down rapidly. A conservative loan-to-value setting on real estate lending will protect the bank from a sudden and deep price correction.
- Interest rates will rise gradually.
- The bank can always push poor performing customers onto another financial institution.
- Poor farm financial management practices by customers can be ignored if the customer has plenty of equity.
- Longer term refinancing of unpaid carry-over operating debt is the best thing to do if the customer still has some equity.
I still believe that farm and ranch lending is a safe, secure and rewarding activity for community banks, and many community bankers are exceptionally good at it. However, any banker who is still partying like it is 2010 will confront some cold truths about farm lending this year. The push-pull farm economy of 2018 will claim many victims – both farmers and their lenders. This farm economy is the new normal. Successful bankers must respond accordingly.
John Blanchfield owns Agricultural Banking Advisory Services, an independent banking consultancy. He speaks and writes on the challenges faced by community banks that lend to farmers. He can be reached at [email protected]