When farmers head to the fields this spring they will be under closer scrutiny from their banks.

Across the country, farm bankers — including Dale Pohlmann, who lends to corn and soybean growers in Ravenna, Neb., and Richard Marquez, who lends to almond and plum producers in Sacramento, Calif. — say their customers' debt loads have risen.

They cite several reasons. Farmers are buying more land. Equipment and energy costs are higher. But persistently low commodity prices seem to be the main culprit.

“With the stress we've had on the commodity markets, there's just not as much income to pay debt down,” said Dennis Hackett, the president of rural banking for the $6 billion-asset First Midwest Bank in Itasca, Ill. Farm debt for real estate and operations rose 4.8% last year, the Department of Agriculture estimated in January, to $192.8 billion, and will rise 1.9% this year, to $196.5 million. That would be the most since 1984, when a crisis that brought down dozens of agricultural banks — those with at least 25% of their loans secured by farmland or used to finance agricultural production — began.

As of last September there were 1,923 banks that fit that description. Thirty-one such banks failed in 1984, up from seven the year before. In 1987, the peak year of the crisis, 75 went under.

But today's farm debt problem is much less severe, economists say. Farm debt-to-asset ratios have held steady for more than a decade, mostly at 15% to 16%, versus 22.3% in 1984. And current farm debt is just 58% of the 1984 level when adjusted for inflation.

Furthermore, various factors mitigate the current problem.

Jim Ryan, an economist with the USDA's Economic Research Service, said part of the increase may reflect farmers' converting household debt, such as student loans, into farm debt to take advantage of lower interest rates. Also, some farmers may be taking out more debt because they can handle it better, he said. One reason they can do so is that more farms have family members who bring money home from other jobs, Ryan said. Another is that larger farms mean more collateral and more land in production to increase cash flow.

“All the supporting evidence that would make you think a doomsday is coming is just not there,” said Ryan. Delinquency rates on loans are not rising, and land values have remained strong, he noted.

Michael H. Swanson, an agricultural economist in Minneapolis for the $293.8 billion-asset Wells Fargo & Co. of San Francisco, said the combination of low interest rates and high land values means even less cause for panic. With rates low, debt can be serviced with a smaller share of farm income.

But bankers seem to take a different view from economists. Bankers typically lend to farmers based on the projected cash flow of the farm from crop sales, off-farm jobs, and government payments into account. For the past several years crop sales have not been lucrative enough to cover farm costs. The difference has been made up from government aid and this has kept many farmers afloat. As the government's budget suffers from the slowing economy, lenders wonder whether the money that made up as much as 50% of net farm income in some areas will be there in the future. In Nebraska, Pohlmann, the president of $55 million-asset Ravenna Bank, is among those worried.

“There are concerns in our area, with the federal deficit, that the dollar amount is going to go down,” he said of government aid programs. He added that farmers and bankers in his area will be relieved when the Farm Bill is finalized so that they know how to plan for the coming year.

American Banker