Iowa Farm Lenders Remain in Good Shape

Despite turmoil in U.S. financial markets, most Iowa agricultural banks and other lenders remain on solid footing.

With a number of financial institutions on Wall Street having to be bailed out by the federal government, Iowans are wondering how this financial turmoil will affect them. Despite the problems in the U.S. financial system and tightening credit nationwide, most Iowa agricultural banks and other lenders remain on solid footing, say Iowa bankers and financial experts.

Farm lenders appear to be able to provide the capital farmers will need in the coming year to finance the rising cost of inputs. However, lenders report that farmer-customers are cautious about borrowing and worry about becoming over-extended as farm operating margins are being squeezed by higher prices for fuel, fertilizer, seed and cash rent.

Most Iowa community banks doing OK

Most rural community banks are in good condition because they didn't get into the types of lending programs like the giant banks on Wall Street did.

While there has been significant stress in the livestock sector due to higher feed costs and very tight hog and cattle profit margins, the higher corn and soybean prices in 2008 have put most rural Iowa banks on very solid footing, says Bob Jolly, a professor of agricultural finance at Iowa State University. "Iowa banks are doing pretty well now," he says, "while banks in other parts of the country are struggling with real estate loans."

In fact, some Iowa bankers say they are seeing many of their farmer customers reducing their credit lines. Usually at this time of year some farmers are bumping up against their credit limits. "We haven't seen as much of that this year," says Eric Walhof of the First National Bank in Sioux Center. "Farmers are using some of their increased 2008 income to pay down loans."

Ag banks in a more stable situation

The most recent survey of ag banks by the Chicago Federal Reserve Bank was in June. It confirmed the Iowa bankers' view that Iowa banks are in solid condition. It reported that most ag-oriented banks in the Chicago district, which includes Iowa, are in strong position. Banks in that survey classified only 2% of farm loan volume as having major repayment problems.

Going into harvest, there's no sign this is changing, according to David Oppedahl, an economist with the Chicago Federal Reserve. It's a more stable situation in ag banking than in the rest of the banking industry, he says.

Ag-oriented banks aren't likely to have problems accessing capital, a factor that is starting to restrict lending by some bigger banks in the U.S. "Most of the community banks in Iowa rely heavily on local deposits for the money to make loans, and those have been very good this year," says ISU's Jolly.

People putting more money in banks

Iowa bankers say the stock market's poor performance is causing people to keep their money closer to home and that's boosting deposits at many rural banks. People are looking at the FDIC (Federal Deposit Insurance Corporation) backing and deciding that's a better way to go these days.

Also, banks' more conservative certificates of deposit are looking better to investors worried about an extremely volatile stock market. CD's don't usually earn as much interest in an investment portfolio compared to stocks, but CD's are now looking comparatively good.

What about the Farm Credit System, the cooperative lender that finances many Iowa farmers? With the farm economy strong, the Farm Credit System has been successful in getting access to credit in national and international markets, says Craig Kinnison, chief financial officer of Farm Credit Services of America, based in Omaha. "We have been able to fulfill our mission of providing capital to our customers," he says.

Rising costs are cause for caution

While the ag banking sector remains strong, the rising cost of inputs is keeping lenders and borrowers cautious as they look ahead to 2009 and beyond. "The cost of production for farmers is skyrocketing, and we're concerned about that," says Walhof. "We have good yields here in northwest Iowa and prices are expected to be strong. But everyone is looking ahead to next year and future years and they're worried about the rising cost of fertilizer, fuel, seed and rent."

With margins narrowing and grain prices remaining very volatile, farmers need to make sure they don't overextend themselves, advises Jolly. Another concern is the financial condition of suppliers, who have also been hit by rising costs for fuel, fertilizer and other inputs. Ag lenders are advising farmers to be cautious when they prepay a supplier for fertilizer, fuel, etc. If you have qualms, check with the dealer's banker. It's important that your dealer or supplier has the financial strength to deliver the goods you've paid for.

TAGS: USDA
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