Low Rates Spell Opportunity and Risk
"When prices are good, everyone wants to be in farming." If that old cliché is true about farmers, it is doubly true of lenders. During the boom of the 1970s and early 1980s, lending to agriculture increased as major banks, investment houses and insurance companies entered the fray. When the inevitable downturn came, many of those eager lenders disappeared. A recent news release from a major insurance company trumpeted a 30 percent increase in its agricultural loan portfolio in 2012 after a 38 percent percent bump in 2011. Does that portend a deluge of easy credit followed by a coming bust? Not likely, or at least not yet, according to longtime agricultural lenders.
"My opinion is that we are still in a period of tighter credit, but there has been some mitigation since the credit drought of 2009," suggested John Blanchfield, senior vice president, Center for Agricultural and Rural Banking, American Bankers Association. "Bankers are scouring the globe to find bankable deals. Credit standards are still high, and it is likely they will remain so for the time being."
"Lenders are concerned about farmland values getting too high and then having a crash as happened in the 1980s following a run-up in land prices in the late 1970s," said Tim Mellencamp, regional vice president, Middle Markets, RaboBank AgriFinance. "To mitigate this risk, lenders are reducing their loan to appraised value limits on farmland."
LENDING: BOOM OR BUST?
That said, the good times being enjoyed by commodity producers are having an impact, and some numbers suggest it is an effect that rivals the booming 1970s. Mellencamp reported that per the USDA, farm debt in constant 2005 dollars is significantly lower today than it was in pre-crash 1979. However, this is deceiving as this debt is concentrated within the overall farmer population. While there are a large number of farmers with little or no debt, there are still a number of farmers with very high debt levels.
Mellencamp cited a 2012 Kansas State study comparing the distribution of debt among farmers in Kansas in 1979 and 2010. The average debt to asset (D/A) ratio in 1979 was 24.6 percent versus 28.8 percent in 2010. Although this suggested a low degree of leverage on average, digging deeper should raise concern.
"The percentage of farmers with D/A ratios greater than 40 percent was 19.4 percent in 1979 and 25.6 percent in 2010," said Mellencamp. "Likewise, the percentage of famers with D/A ratios greater than 70 percent was 1.3 percent in 1979 and 5.9 percent in 2010. I believe this pattern would be similar in most other states."