Farm loan delinquencies have hit a 17-year high, and 2.3 percent of all agricultural production loans made by commercial banks were past due, up from 1.3 percent a year ago, according to the Federal Deposit Insurance Corp.
The number of Minnesota farmers defaulting on agricultural loans has swelled dramatically since 2008, reaching levels not seen since the 1980s farm crisis permanently altered the state’s rural economy, reported the Minneapolis Star Tribune October 4.
Lenders have sent farmers more than 3,670 default notices in the past 12 months, according to the University of Minnesota’s Farmer-Lender Mediation Program. That’s up 83 percent in just two years.
The tight credit that has roiled the real estate industry is taking its toll on farm country. Farmers already are struggling with other problems, such as zigzagging commodity prices. Lenders are under pressure from regulators to add cash to their books and shed underperforming loans. The defaults involve all types and sizes of farms, in every part of the state, said Mary Nell Preisler, who directs the University of Minnesota program, which helps farmers find ways to stay in business. It’s not only small family farms, she said: “It’s everything.”
Most of the default notices are coming from small-town banks, where farmers often turn for at least some of their borrowing, Preisler said. While the stream of notices is relatively small considering the state has about 80,000 farms, it represents a serious undertow, farm advocates say.
“It’s kind of a silent crisis,” said Roger Grugel, a St. Cloud lawyer who helps negotiate with banks as part of the Minnesota Family Farm Law Project. “It’s much different than the 1980s when people were protesting and there were tractor-cades.”
“I’ve seen farmers getting cash advances on their credit cards to put in their crops,” Grugel said.
In some cases, farmers are finding a way out of financial trouble, in part because prices for farm land have remained strong. A mediator in Preisler’s program said that for every default notice that goes out, there’s another farmer who probably wrangled a fix.
Still, some banks are cutting the lines of credit that farmers use to cover operating expenses or requiring more collateral to shore up loans. Others are quietly sending farmers elsewhere when their loans mature.
Lenders say they are under pressure from regulators to add cash to their books and shed underperforming loans. Grugel said that when he goes to mediations, bank officials say, “Well, we’d like to rewrite this, but our regulators won’t approve us restructuring this loan.”
Jim Anderson, a farm financial analyst in Rochester who works with the mediation program, said he doesn’t think banks are the bad guys in the current situation. Many rural banks have really worked with farmers in trouble. But in an age of intense bank scrutiny, some loans just smell too sour, he said.
“I’ve seen a lot of lenders who are heartsick because they have to foreclose on a farmer who they’ve worked with for 15 years because they can’t find a solution,” Anderson said.
Marshall MacKay, president of the Independent Community Bankers of Minnesota, which represents most of the state’s rural banks, said banks are getting more aggressive with delinquent ag loans. MacKay and some other small-town bankers said they see no farm crisis brewing. The agricultural economy, overall, is pretty good, they said.
“You could make the case that notices are up because regulators are taking a more aggressive stance on lenders taking action against delinquent borrowers,” MacKay said. “The real question is: Is that an indicator of more challenging times or more aggressive banker management of farm credits?”
It’s both, some in the industry say. Soaring input costs in recent years — fuel, seed, fertilizer, feed — clobbered farmers. Hog and dairy farmers, who also suffered falling prices for their products, were squeezed particularly hard. A bumper grain crop may eventually drive down feed prices, but it won’t solve the problems.
For help, rural banks are increasingly turning to the Farm Service Agency (FSA), an arm of the U.S. Department of Agriculture. FSA guarantees loans for up to 90 percent of the value. FSA loans in Minnesota, both direct loans and ones from banks with FSA guarantees, have jumped to 1,839 so far this fiscal year, up from 1,359 in 2008. That’s the highest level since the mid-1980s, barring a few years when the state suffered natural disasters, said Stuart Shelstad, head of farm loans in the state FSA office.