Leading U.S. agricultural lenders, including some commercial banks and the Farm Credit System (FCS), could be impacted by the souring farm economy, in part because growth in their loan portfolios in recent years has been heavily rooted in farmland appreciation, a report released on Tuesday by Fitch Ratings said.
But while such institutions could see the quality of some of their assets deteriorate, the relative strength of the current Farm Credit System and a less volatile interest rate should ease any adverse impact on lenders, Bain Rumohr, director of Fitch Ratings, told Reuters.
While there are some parallels between this farm downturn and the agricultural crisis of the 1980s, the differences are significant enough that the result on the U.S. lending sector should be more benign, the report said.
As a result, Fitch doesn’t expect the sector's worsening conditions to affect the ratings of FCS or the individual banks in the system.
Economic erosion continued to squeeze Midwest farmers' capital expenditures and pressure farmland values and cash rents in the first quarter of 2016, according to quarterly reports on the agricultural economy released last week by the Federal Reserve Banks in St. Louis, Kansas City and Chicago. Repayment rates for non-real estate farm loans also continued to sour.
How much the softer farm economy will impact banks and lenders in the Farm Credit System depends on how much exposure to the sector the entity has.
Rumohr said Fitch expects smaller banks with agricultural loan portfolios larger than 5 percent will begin increasing their loan provisioning in the coming months to help manage the agricultural slowdown, just as banks with larger exposure to the energy sector have done.
Fitch also expects agricultural banks and lenders' loan portfolios to grow in the near to medium term, as farmers scramble to stay afloat with bigger operational loans and commercial banks pull back from the space.