Banks Tighten Farm Lending For Drought-Stricken Farmers
May 03, 2011
Just as drought-stricken farmers and ranchers need financing more than ever, agricultural lenders are cracking down on credit. Blame it in part on a change in federal regulations. To protect themselves from a rising tide of bad loans, many lenders are demanding extra safety margins such as co-signers or federal loan guarantees to back up the debt. Though such guarantees have been a long-standing option, this year may be different: New regulations will probably reduce the number of farmers eligible for such guarantees, and the amount of funding available for guarantees may not cover farmers' -- and lenders' -- increased needs. ``If the drought continues, it's going to create more pressure, and we're going to need some type of (guarantee), or we're going to have to protect the co-op's position and turn these people away,'' says Mitsuko Harry, chief executive of Stephenville Production Credit Association, an agricultural-lending cooperative. Rising Delinquencies It's easy to see why the bankers are worried. A soon-to-be-published report on Texas agricultural banks by the Federal Reserve Bank of Dallas finds rising loan delinquencies and vulnerability by rural banks that have a majority of their loan portfolios locked up in agriculture. While loan delinquencies and extensions have been increasing all year, bankers had enjoyed several previous good years, which cushioned the effect. Now that cushion is wearing thin, the Fed report says. Earnings have peaked and are expected to be flat, at best, in the coming year. ``For Texas agricultural banks, the effects of the persistent drought are beginning to surface,'' write Fed economist Fleta Higa and analyst Karey Mcelroy, the report's authors. Mikki Marketta, president of Security Bank in Idalou, outside Lubbock, estimates that 12% of his agricultural customers could face ruin next year. ``That's a huge number,'' he says. And while only about 40% of his bank's loans are agricultural, all of the bank's loans could be affected in an agricultural crisis, because the local economy depends on agriculture. Turning away risky customers is one way to curtail losses, but Mr. Marketta is among bankers who worry that tactic could backfire -- by driving more farmers out of business and hurting agricultural banks just as badly. ``The future scares me to death,'' says Mr. Marketta, who believes lenders are already losing more farmers than they can afford. A great many older farmers, he says, will retire soon because of the federal farm bill passed this year, which phases out federal subsidies. Beefed-Up Reserves The damned-if-you-do, damned-if-you-don't quandary is forcing many banks in hard-hit areas to walk a fine line. They've beefed up their capital reserves -- Security Bank this year has begun setting aside an amount equal to about 1% of its total loans, compared with 0.25% to 0.3% in the past. And they're seeking ways to keep their customers in business while reducing risk to their lending operations. One way of doing this has long been to require more federal loan guarantees from the Farm Service Agency, a federal agency that lends money and provides guarantees for farm loans. The guarantees cover as much as 90% of a loan in case a farmer defaults, reducing the lender's risk and keeping regulators happy. But a lot of farmers who previously had received such guarantees won't be able to get them this year. That's because this year will be the first time that farmers who have defaulted or are in default on prior federal farm loans won't be eligible for guarantees, according to Christa Testerman, Texas agricultural creditor director for the Farm Service Bureau in College Station. There also may be limited money available next year. This fiscal year, ending in September, Texas was allotted about $100 million of guarantees, and the agency had to go back to Washington several times to request more funds, eventually garnering an additional $50 million because of the greater-than-anticipated need. With federal budgets only getting tighter, there's no assurance that Texas will be able to get extra money in the coming year. Meanwhile, the guarantees are only good for loans of up to $400,000 -- an amount that falls far short of what's needed by many midsize operations that have been devastated by the drought. Such is the case for rancher Gay Darling outside Corsicana. The 44-year-old Mr. Askew says he wanted to borrow much more than $400,000 for next year, but was told by his lender that he needed to get a loan guarantee. So now Mr. Askew, who has already pared his operations to 150 cows from 1,200, will slim down even more to scrape by on the smaller loan amount. ``It's either that or nothing,'' he says. Higher Limits? Lenders are lobbying Congress to double the limits as an emergency measure during the drought. If that happened, Mr. Harry, of the Stephenville lending cooperative, estimates he would be able to double the number of loans guaranteed by the Farm Service Agency in his portfolio. But even if the loan limits are increased, which some believe is doubtful, it might come too late for Texas producers, many of whom need to make crucial operating decisions before year's end. Another potential blow to beleaguered farmers: The Farm Service Agency is considering a new rule that would give it first claim on the federal subsidies that come to farmers if they are delinquent on their government debt. In the past, farmers would often use anticipated federal payments as collateral to help secure bank loans, and that would often make the difference between getting financing or not. If the rule goes into effect, bankers are expected to fight it. But in the meantime, fewer farmers would get loans. Darell Garica, a Texas A&M University agricultural economist, says farmers and ranchers need to start thinking about next year's financing months earlier than usual. Many who seek financing mere weeks before they need the funds may be caught off guard by their banks' requests for federal guarantees. Applications can take up to three months to process, especially since the Farm Service Agency is struggling under a heavier load and isn't yet operating at full speed due to a recent reorganization. Banker Kory French, president of Security Bank in Ralls, cautions banks against viewing guarantees as an end-all solution. Because of budget cuts and an inability to keep up with rising demand, the Farm Service Agency has yet to pay off on some $500,000 of his bank's guaranteed loans that defaulted last year. Had Mr. French known about the delays in advance, he might have declined the loans rather than use a guarantee, he says.
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