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Farmers flush with cash has meant weaker demand for agriculture loans

After a rough couple years, farmers have reason for optimism due to favorable weather patterns this year, positive developments in the trade war and a surge in interest in rural farmland as COVID-19 has some individuals fleeing cities. But for lenders, the prospect of farmers flush with cash, in part due to government stimulus programs, has meant weaker loan demand.

Banks reported $180.09 billion in agriculture lending in the third quarter, down from the second quarter and 2.7% lower than the year-ago quarter. Farm loans, or those secured by farmland, totaled $103.31 billion, the lowest level since the second quarter of 2018. Agricultural production loans, or those that are secured or unsecured and meant for the production of agriculture commodities, were also lower on a year-over-year basis.

Farmers are holding excess liquidity received through government programs, including the stimulus act, reducing borrowers' need for loans, said Dave Coggins, chief banking officer at Manitowoc, Wis.-based Investors Community Bank, a subsidiary of County Bancorp Inc.

"For the long-term, it's probably been a good thing, but short-term, it's had a negative effect on loan demand," Coggins said in an interview.

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Delinquencies on farm loans were down quarter over quarter to 2.30% from 2.60% in the second quarter but up from 2.11% in the third quarter of 2019. Agricultural production loan delinquencies were 1.79% of total loans, also down on a linked-quarter basis but higher from the year-ago period.

Despite modestly higher delinquencies on a year-over-year basis, many in the industry see positive signs on the horizon. Farmland values, often used as collateral, are high while interest rates remain low, said Nathan Race, a bank analyst at Piper Sandler & Co.

Federal aid to farmers has also helped support farm income and land values, said Brian Philpot, president, CEO and principal owner of AgAmerica Lending LLC, a farmland mortgage lender. As COVID-19 has hit cities harder, several reports have indicated more people are moving to rural areas has also caused the price of land to rise.

While there has been a long-running reduction in the overall number of farms, there has been increased interest in small farms less than 50 acres, Philpot said. "We've continued to see that trend during COVID times on an accelerated basis."

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Commodities prices were volatile through spring lockdowns, in part due to uncertainty around restaurant needs for supply. About 83% of Investors Community Bank's agriculture portfolio is in dairy, which went through volatile pricing in the spring before settling above break-even levels, Coggins said. Lockdowns were not as detrimental to dairy producers as initially projected due to restaurants pivoting to takeout service, Coggins said.

The trade war, which first hit agriculture products in 2017, eased some in 2020 as officials reached a "phase one" deal on Jan. 15. "There's certainly been good buying of milk powders and things like that. That helped support dairy prices throughout the world," said Coggins. "Our exports have been solid in recent months."

Fall harvests were also strong this year without significant weather interruptions that were seen in past years. Corn and soybean prices in the United States have also been bolstered by dry weather in South America during the spring planting season. "There's opportunities right now for the 2021 sales to lock in some decent profit," said Coggins.

Agriculture lenders have been creative when interacting with clients through the pandemic. "We obviously needed to work with [farmers]. And that's part of agricultural lending it's relationship lending," said Philpot.

When it comes to working with farmers, the pandemic has forced bankers to adopt new protocols, including virtual meetings and digital signing capabilities, Coggins said. But in-person meetings are still required, due to the lack of broadband in rural areas and a need for bankers to assess the health of the farms. "Sometimes you just have to go there. We're doing all the guidance practices wherever we can. We're trying to stay outside," he said. "Our travel to farms, which is a big hallmark of how we service our [agriculture] customers, is down significantly."

Working with farmers on deferrals and other stimulus programs helped lenders maintain credit quality through the uncertainty, said Philpot. "We have not seen some drastic uptick in delinquencies, and the sky is definitely not falling."

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