David B. Oppedahl, senior business economist for the Federal Reserve Bank of Chicago recently wrote bankers, responding to a current survey, expected non-real-estate agricultural loan volumes (especially those for operating loans) to increase in the third quarter of 2014 compared to the same quarter last year. Current peer group discussions among lenders confirm this to be true. In tandem, in a statement made by Nathan S. Kauffman, Assistant Vice President Federal Reserve Bank of Kansas City, before the House Committee on Agriculture Subcommittee on Livestock, Rural Development, and Credit in June, 2014, in his “Looking ahead” comments said;
The level of working capital and liquidity in the farm sector will be crucial components of the financial health and credit conditions surrounding U.S. farm operations.
If profit margins remain under pressure in the crop sector and debt continues to rise, the ability of crop producers to withstand an increase in financial stress may be a concern, even as the outlook for the livestock sector has improved.
Due to current economic Ag conditions, there will be a lower profit margin for farm borrowers and a corresponding stress for Ag businesses. For Ag lenders, increasing non-real estate loans and declining deposits as commodity prices weaken and crop input costs continue to be high, will potentially lead to loan payment defaults. Most believe it will take two to three years to bring costs more in line with revenues.
To mitigate this stress, and to maintain the financial health of the borrower, proactive action by the Ag lender is required. VITAL serves as the resource for lenders to assess the situation and to help utilize the tools for both the borrower’s and lender’s advantage. Ask us how we can help you and your customers.
About the authors –Larry Reding and Duane Strempke and have over 65 years of combined banking and borrower consulting experience and are also well known names in the risk management and consulting arenas. Experienced in loan workouts, Ag credits and farm management, Duane and Larry provide expanded credit solutions for community banks. They can be reached at VITAL Financial Services at (515) 225-4876.
Call VITAL today for more information on how we can help you and your borrowers through the upcoming volatile economic climate and for a FREE tailored proposal for your bank’s unique situation.