The Farm Credit System of ag lenders has seen a spike in troubled loans as many farmers struggle with low prices, even as profits have grown for the banks themselves.
Non-performing assets, such as loans that are past due, shot up about 20 percent during the system’s first three quarters of 2018, to $2.4 billion, while the level of charged-off bad debt more than doubled, from $21 million to $53 million.
Even so, the system’s total loan volume rose nearly 2 percent in that time, to $263.6 billion, which helped to boost its net income to $4 billion, up from $3.7 billion at this point last year.
The increase in non-performing assets and charge-off is not unexpected given financial problems experienced among producers of dairy, hogs and soybeans, said Hal Johnson, senior financial analyst for the Farm Credit Administration, which regulates the system.
“We recognize that certain ag sectors have been under stress for several years,” Johnson said.
Though the agency expects the system to experience additional credit quality deterioration in the future, the network as a whole is well-capitalized and poised to handle risk, he said.
“The system is financially sound,” Johnson said.
With retaliatory tariffs continuing to be imposed on crops and livestock products, combined with overproduction of certain commodities, many U.S. farmers generally face a challenging economic outlook, he said.
“These will present headwinds for the agricultural sector,” Johnson said.
Balancing production with demand is always a difficult task for agriculture, especially as productivity continues to grow in sectors such as dairy and the export-reliant pork industry struggles with tariffs, said Dennis Shields, FCA’s chief economist.
“The demand side is a question mark in terms of trade,” he said.
Realistically, this means farmers will be drawing on cash reserves, scrutinizing their capital expenditures and household expenses, as well as increasing off-farm income, said Shields.
“There are a lot of options and possibilities out there,” he said.
Even so, it’s the system’s mission to provide loans to credit-worthy borrowers, though many will now be working with less capital, said Johnson. “They may be more highly leveraged than in the past.”