Ag lenders weather rough economy

Nonperforming loans increase but not to alarming level

By MATEUSZ PERKOWSKI

Capital Press

Farmers are having a harder time meeting their debt obligations, according to the most recent data from banks within the Farm Credit System.

The system's volume of nonperforming loans has increased by about $1 billion in the past three months, according to data from the nation's largest agricultural lender.

When a loan does not accrue interest -- or if the farmer is late on payments or restructures his debt as part of a bankruptcy -- it's considered nonperforming.

Farm Credit System banks had about $4.3 billion in nonperforming loans on their books at the end of the third quarter of 2009, a 34 percent increase from the prior quarter and a four-fold increase in the past year.

The recent hike in nonperforming loans is certainly not good, but the volume has not reached an alarming level, said Jay Penick, CEO of Northwest Farm Credit Services, a member of the system.

"It's expected for these particular times," Penick said. "It's typical of a down cycle."

Currently, nonperforming loans make up about 2.8 percent of the system's total loan volume.

During the disastrous agricultural recession of the 1980s, that rate was usually two to three times higher, Penick said.

"The drivers of this downturn in the general economy and in agriculture are much different than they were in the '80s," he said.

Back then, farmers suffered as land values rose sharply and then deflated, Penick said.

That left many growers with high debts and low collateral.

The current deterioration in agricultural credit quality is primarily due to problems in the dairy, hog, ethanol and forestry sectors, according to analysis from the Federal Farm Credit Banks Funding Corp., which funds banks within the system and compiles their financial data.

The West has particularly felt the brunt of the dairy downturn, which was aggravated by skyrocketing production costs, said Penick.

The region's nursery and timber operators are also struggling due to the weak construction economy, he said.

"Those loans, those customers are having a difficult year," Penick said.

The economy's effects on the wine sector may also be reflected in financial data in 2010 and 2011, he said.

"It hasn't showed up yet, but we know the inventories in that industry are building," Penick said.

It generally takes time for farmers' financial struggles to be reflected in loan data, said Michael Swanson, agricultural economist for Wells Fargo bank.

"It's clear we're seeing the accounting statement of the damage we knew was happening," he said.

Wells Fargo does not break out numbers for agricultural loans in its financial statements, but the bank's overall nonperforming assets have risen about 28 percent, to $23.45 billion, in the past three months.

The year-to-year jump would be even higher, but the comparison wouldn't account for Wells Fargo's merger with Wachovia, according to filings with the U.S. Securities and Exchange Commission.

Swanson said one important sector of the overall farm economy has seen a remarkable reversal: Ethanol producers are enjoying a significant rebound.

Ethanol prices have risen along with the cost of oil, but the industry's major input -- corn -- is not nearly as expensive as during the record highs of 2008, he said.

For ethanol producers who managed to survive the crash in prices, profit margins are currently favorable, Swanson said. "You're just an ATM machine spitting out big returns."

If the ethanol industry's recovery continues, it may prompt another speculative cycle that drives up corn prices -- a big help to crop farmers and a detriment to livestock producers, he said.

"They're locked into this antagonistic situation," Swanson said.

The danger is that many livestock and dairy operators are already hurting badly, and are in no shape to weather another round of commodity price spikes, he said.

"The biggest problem is we've put ourselves in a fairly high-risk situation," Swanson said. "They are very vulnerable right now."

Staff writer Mateusz Perkowski is based in Salem, Ore. E-mail: mperkowski@capitalpress.com.

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