Pub. 5 2016 Issue 9

l e a d i n g a d v o c a t e f o r t h e b a n k i n g i n d u s t r y i n k a n s a s 30 IS FARM LENDING STILL GOOD FOR COMMUNITY BANKS IN KANSAS? U SDA PROJECTS THAT 2016 net cash farm income will come in around $94 billion, down from the record $135 billion received in 2012. After more than a decade of spectacular returns, farmers are now trying to right size their business models to meet this new reality. They are trimming family living expenses. Farm equipment manufacturers are reporting reduced sales. Machinery dealers are seeing a glut of used equipment on their lots. Cash rents are starting to decline. Bankers (and their examiners) are developing increased concern about their ag loan portfolios as more and more customers seek refinancing of unpaid operating loan advances. Is this the time for community banks in Kansas to shed farm assets, or is this time to look for new opportunities in agriculture? While the current economic data points to a rather grim reality for farmers, there are many mitigating factors that may make the adjustments being made by farmers less painful. Many farmers are still holding cash they acquired when times were good. Farm real estate values have not declined precipitously. Debt levels remain relatively low, and as a result, many farmers have healthy balance sheets that will enable them right size their payments to their reduced cash flows. Despite political turmoil over the creation of the last farm bill (The Agriculture Act of 2014), agriculture ended up with a fairly conventional piece of farm legislation that will pay some serious money to farmers if prices remain low. In 2015, the first year that there was a payout, the Farm Bill paid $5.2 billion to over 976,000 farms. Kansas farmers received $302.5 million in payments in 2015. This year the Farm Bill will pay over $7 billion to 1.7 million farms, and Kansas farmers will receive over $340 million. These payments started going out to Kansas farmers in October. Banks will not escape all pain during this period of economic adjustment, but there are three key elements in place today that will help bankers mitigate the painful economic adjustments that are occurring in agriculture. Following the wreck of the farm economy in the middle 1980s, visionary bankers reinvented agricultural banking and as a result community banks are much better positioned to meet an economic downturn in agriculture than they were over thirty years ago. Congress created a unique lending tool just for ag lenders at the end of the 1980s - a secondary market for farm real estate mortgages known as Farmer Mac. To this day, many community banks fund their long term farm real estate lending with volatile short term deposits and hold these loans in portfolio. As a result they are vulnerable to both credit and interest rate risk. Community bankers have the opportunity to use the secondary market created by Farmer Mac to enable them to originate long term, fixed rate farm mortgages. Farmer Mac enables banks to preserve the relationship with their farm customers while shedding credit and interest rate risks. It is not agricultural real estate lending like it was done in the past, but it is a way for community banks to safely compete against other, larger lenders. USDA, through the Farm Service Agency, now provides a credible guaranteed loan program that has enabled banks to extend credit to over 35,000 farmers who would not qualify for credit without a guaranty. Demands on funding for the guaranteed loan program hit all-time highs in 2016, reflecting the expanded use of the program by bankers and perhaps increased scrutiny of farm loans by bank examiners. Expect to see continued high demand for this program. Bankers have access to better farm financial statements than ever before. Following the farm financial crisis in the 1980s, a group of bankers got together to try to standardize what constituted a standard set of farm financial statements and to reach some agreement on how to analyze them. The result, under the stewardship of the Farm Financial Standards Council, is an industry agreed to set of financial statements for agricultural producers and an agreed to set of financial ratios that bankers use to analyze the information. There is still much work to be done to improve farm financial standards, but a strong foundation has been laid. Kansas bankers have rolled with the punches thrown by agriculture over the decades and they have always emerged stronger than before. Agricultural lending is a key component of the success of many Kansas community banks, and it will remain so. Banks that have the desire and the staff needed to stay in agricultural banking will find new opportunities in this environment. It will not be easy, but it can be done. John Blanchfield owns Agricultural Banking Advisory Services, an independent consultancy that works for community banks that lend to farmers and ranchers. He oversaw agricultur- al banking policy for the American Bankers Association in Washington for over 25 years. He can be reached at john. blanchfield@verizon.net By John Blanchford