Banker Association: Trouble Brewing In Farm Sector

The American Bankers Association (ABA) said the earnings of U.S. farm banks sank 10.3% in 2008 as the global recession seeped into the rural economy, The Wall Street Journal reported. The ABA defines a farm bank as an institution that has less than $1 billion in assets and at least 14.2% of its loan portfolio in agriculture.

According to the ABA, a Washington D.C., trade group, the 2,247 farm banks in its annual survey generated $3.0 billion in income before taxes and extraordinary items in 2008 compared to $3.3 billion in 2007. Despite the earnings decline, farm-town lenders were still one of the strongest parts of the banking sector. According to the ABA, the return on average assets for farm banks was 0.85% in 2008 compared to ROA of 0.14% for non-farm banks.

Farm banks came through 2008 with fewer problems than those in the non-farm sector, in part because farmland values had yet to be hit by the sorts of declines that plagued urban markets. Debt-to-assets ratios for farmers were at all-time lows in 2008.

The problems for farmers are likely to become greater, as incomes of farmers, which soared to record highs in 2007 and 2008, are projected by USDA to sink 20% this year. Some players in the overbuilt corn-to-ethanol fuel industry are falling behind on loan payments. And prices of cropland across much of the Midwest farm belt began sinking over the winter.

According to the ABA survey, the quality of loans at farm banks eroded significantly in 2008. Total non-performing assets hit $2.4 billion in 2008, up 58.6% from 2007. This category includes assets on which payments are 90 days past due and loans that aren’t accruing any interest. The survey found that 1.44% of loans at farm banks were deemed non-performing in 2008 compared to 2.53% of loans at non-farm banks.

John Blanchfield, director of the ABA’s Center for Agricultural and Rural Banking, said he expects “turbulence” for 2009.