Agricultural Bank Performance In The Financial Crisis

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With fragile financial markets, agricultural producers have concerns about financing agricultural investments. Even though agricultural banks outperformed their banking peers during the recession, bank profits declined. Still, agricultural bankers report having ample funds for farm loans at historically low interest rates.

Agricultural banks outperformed banks nationwide during the recent financial crisis but still saw profits fall sharply. In the third quarter of 2009, agricultural banks saw their rate of return to assets and equity drop to roughly half their pre-financial crisis levels. At agricultural banks, the average rate of return to assets and equity fell to 0.6 and 5.5, respectively. In contrast, other small commercial banks reported negative returns to assets and equity. During the entire year, less than ten agricultural banks failed, while closures of commercial banks soared to 140.

With stronger profits than their peers, agricultural banks have consistently reported that funds have been available for creditworthy borrowers in the farm sector. Throughout the recession, most bankers responding to Federal Reserve Bank agricultural credit surveys reported that funds were available for non-real estate farm loans. In the Kansas City District, few agricultural loans were denied due to a shortage of bank funds. Loan approval decisions were based primarily on projected cash flow from farm operations and the amount of collateral pledged (Briggeman and Akers).

The ample funds at agricultural banks have supported a high volume of low-interest loans to the farm sector. According to the Agricultural Finance Databook, the total volume of non-real estate agricultural loans at commercial banks declined slightly in 2009 from the year before but remained above the ten-year average (Chart 1). Over the past few years, however, the composition of the average farm loan portfolio at agricultural banks has shifted. The proportion of loans to support current operating expenses rose from 45 percent in 2005 to over 60 percent in 2009. This increase in operating loans was driven by surging production input costs, especially for fuel, fertilizer and livestock feed. Various national and regional Federal Reserve surveys on farm lending also reported a steady drop in farm interest rates for short-term operating loans, intermediate-term machinery and equipment loans, and long-term real estate loans.



Source: Iowa State Ag Extension



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