AgDM newsletter article, April 1999

Agricultural lender survey

Bob JollyBy Bob Jolly, Professor of Economics, 515.294.6267, rjolly@iastate.edu, and Katie Hensley, Undergraduate Assistant

Throughout most of 1998, economic conditions in agriculture continued to decline.  Prices for all of Iowa’s major farm commodities were down significantly from a year earlier.  Further, current near term forecasts indicate that there is little likelihood for a rapid recovery. 

Careful monitoring of farm financial conditions is essential for good decision making whether by farmers, lenders or elected officials.  This report summarizes information provided by agricultural lenders on the financial status of their farm borrowers.  Lender information can be used in conjunction with farm level and sectoral level reports to better understand the extent and possible consequences of farm financial stress.

Approach

Information used in this report was obtained from a survey of Iowa commercial banks, Farm Credit Services (FCS) and the Farm Service Agency (FSA) operating in Iowa.  The survey was collected from February 19 to March 12, 1999.

Commercial banks were surveyed by mailing the instrument to all known agricultural departments in the state, using a mailing list provided by the Iowa Bankers Association.  Approximately 450 surveys were mailed and 145 were returned.  The usable response rate was 32 percent.  Responses were evenly distributed across the state.

The FCS agreed to participate in the survey.  However, they chose to report centrally.  Consequently one survey instrument was returned representing the entire Iowa agricultural loan portfolio for FCS.

The FSA mailed the survey to their local Farm Loan Program Supervisors.  A total of 41 supervisors responded – nearly 100 percent return.  Note that the FSA was only asked to report on their direct loan portfolio.

Net worth trends

Net worth trends for farm borrowers since January 1996 are summarized by lender in Table 1.  This 3-year time period begins just ahead of the high-income years of 1996 and 1997 and ends following the 1998 sharp price declines.

Table 1.  Net worth trends since January 1996  (percent of farm borrowers)

Net Worth Change

Banks

FCS

FSA

Increased 50% +

1%

11%

3%

Increased 25-50%

5

17

5

Increased 5-25%

21

40

19

Stable  + or - 5%

38

23

36

Decreased 5-25%

27

6

20

Decreased 25-50%

7

1

12

Decreased 50% +

2

1

5

Commercial banks and the FSA report similar balance sheet trends.  Over a third of their borrowers maintained net worth with nearly equal proportions showing gains and losses in the 5-25 percent range.  Approximately 18 percent of FSA borrowers experienced net worth losses in excess of 25 percent.  The FCS reports an overall net gain in net worth for its borrowers since the beginning of 1996.  Less than 10 percent of FCS borrowers show declines in net worth.

Agricultural loan portfolio quality and protection

The proportion of farm borrowers considered by the lenders to be financially stressed is reported in Table 2 along with the associated loan volume.  Since FSA, is by design, the lender of last resort, their direct loan portfolio consists almost entirely of financially vulnerable farm businesses.  FSA respondents were asked to estimate the proportion of borrowers experiencing above average financial problems.   

Table 2.  Agricultural loan portfolio quality and protection (percent)

Banks

FCS

FSA

Financially Stressed Borrowers

20%

6%

38%

FSA or SBA Guarantee Coverage

Financially Stressed Borrowers

23%

<1

NA

All Borrowers

8%

<1

NA

Commercial banks reported that nearly 20 percent of their borrowers are financially stressed.  There was a great deal of variability across banks however with estimates ranging from 0 to 90 percent.  Financially stressed borrowers hold approximately 23 percent of banks' agricultural loans. FCS reported 6 percent of borrowers and loan volume as financially stressed.  This relatively low level is consistent with their reported net worth trends.  For FSA, 38 percent of borrowers were considered to be financially stressed and owe 46 percent of the direct loan volume. Reported estimates ranged from 5 to 100 percent.

The use of loan guarantees available through FSA or through the Small Business Administration (SBA) allows commercial lenders to mitigate some of the risk associated with financially stressed borrowers.  Table 2 summarizes this information for banks and FCS.  Commercial banks report approximately 23 percent of financially stressed loan volume is covered by guarantees.  In contrast the FCS reports that guarantees have been used on less than 1 percent of their financially stressed loans. 

Age profile

Many previous studies have shown that financial stress is more likely to be experienced by younger borrowers.  This is usually the result of increased debt levels associated with expansion early in the farm business life cycle.  Information reported in Table 3 is generally consistent with these trends for banks and the FSA when compared to the 1997 Iowa Census of Agriculture.  For the FCS, financially stressed borrowers tend to be somewhat older.

Table 3.  Age profile of financially stressed borrowers (percent)

1997

Age Groups

Banks

FCS

FSA

Ag Census

Under 34 years

12%

1%

9%

9.9

34-44 years old

34

9

25

23.0

45-54 years old

34

22

34

23.7

55-65 years old

17

26

25

21.1

Over 65 years

3

28

7

22.3

Other entities

*

14

*

*

*not reported

Reasons for financial stress

Lenders were asked to assess the reasons for financial stress using a five point scale from 1 (least important) to 5 (most important).  Table 4 reports average scores for banks and the FSA.  Because FCS submitted a report for their entire Iowa loan portfolio, only a single score is given.

Table 4. Reasons for Financial Stress (5 = most important, 1 = least important)

Banks

FCS

FSA

Wealth-reduced yields

2.6

1

3.0

Poor hog and cattle prices

4.5

5

4.6

Poor grain prices

4.5

4

4.6

Animal disease problems

1.9

1

2.1

Carryover financial problems

3.3

3

3.6

Recent expansion

2.9

2

2.6

Inadequate management skills

3.2

2

3.5

Inadequate marketing skills

4.1

4

4.3

Personal health problems

1.6

1

1.9

Excessive family living expenses

3.0

2

3.0

Farm business too small to support family

3.6

3

3.5

Loss of off-farm job

1.7

1

1.8

There is a great deal of consistency across all three lenders on the reasons for financial stress – low cattle, hog and crop prices and inadequate marketing skills.  Loss of off-farm jobs, animal disease problems and personal health problems were generally not felt to be important.  Accumulated or carryover financial problems and recent expansion, often identified as important causes of financial stress, were ranked as somewhat important.

Lenders could also identify other sources of financial problems not included on the survey.  The most frequently mentioned were excess credit card debt and gambling.

Borrowers’ expected intentions

Lenders were asked to assess the likely prognosis for their farm borrowers for 1999 and the next 2 to 3 years.  This information is summarized in Table 5.

Table 5.  Borrowers’ expected intentions, 1999 and beyond (percent)

               Action

Banks

FCS

FSA

Will not receive financing for 1999

    2%

 1%

 3%

Will voluntarily leave farming in 1999

3

3

4

Will operate in 1999 and over the next 2-3 years:      

Will require major operating and financial

 changes in order to survive

20%

10%

28%

Will continue to operate in their present situation

47

42

40

Will likely expand their farm operation

10

35

10

Will retire from farming with a successor

5

5

4

Will retire from farming without a known successor

6

1

5

Will voluntarily cease farming and shift to off-farm employment

7

3

7

For all three lenders, only 1-3 percent of their farm borrowers were expected to be denied credit for the coming year.  However an additional 3 percent were expected to voluntarily leave farming in 1999.

Looking ahead over the next 2 to 3 years, however, the lenders do see some changes in their farm borrowers and loan portfolio.  Banks estimate 20 percent of their farm borrowers will require major restructuring if they are to continue in operation.  This contrasts with only 10 percent reported by FCS and 28 percent reported by the FSA.  Again there is a great deal of variability in the assessed restructuring levels.  Both banks and FSA report restructuring levels ranging from 0 to 70 percent of borrowers.

The lenders are consistent with their estimates of farm borrowers who would continue with their present operation – 40 to 47 percent.  Banks and the FSA reported only 10 percent of current borrowers would expand over the next 2-3 years.  The FCS is more optimistic with 35 percent of their borrowers and half of their agricultural loan portfolio expected to expand.  Finally, all lenders estimated retirements and exits to off-farm work at 10-15 percent of farm borrowers.

Summary

This lender survey provides an interesting perspective on farm financial conditions.  Some of the key inferences are that:

Duration is key

Our experience in the 1980s would suggest that financial problems in agriculture develop over a period of time.  If prices remain relatively low over the next year or two, it will become increasingly difficult for lenders to continue to extend credit to financially stressed farm businesses.  Further, we would expect to see an increase in the number of farms requiring major restructuring.  If, on the other hand, prices increase sharply in the coming year, most lenders and their farm borrowers have sufficient financial strength to shake off the impact of the past year.  In the coming year, lenders and borrowers must carefully monitor economic conditions as well as individual loan performance.

 

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