“We have a lot of concern about the current financial stress in the agricultural industry. However, the current environment in the ag lending sector is remarkably good considering we’ve had low commodity prices for the past five years, and considering the economic conditions we’re faced with today,” says Alton McRee, president of CEO of the Federal Land Bank Association of South Mississippi in Jackson, Miss.
Speaking to a group of agricultural economists attending the Southern Region Agricultural Outlook Conference in Robinsonville, Miss., McRee said, “I pinch myself everyday, and ask myself, when is this bubble going to burst, because things are remarkably good from the standpoint of overall agricultural loans and loan performance.”
Involved in agricultural lending since 1977, McRee says he has been around long enough to see the absolute best and worst of times. From a lender’s perspective, he says, the agriculture credit sector is strong and lenders are continuing to be proactive with regards to agricultural lending.
“The Farm Credit System, as well as the commercial banking sector, has very strong financials, and we really don’t see many signs of stress in our loan portfolios. It’s just remarkable,” he says.
Agricultural credit continued its upward trend in 2001 in the commercial banking sector, and actually expanded by about 5 percent. That marked the ninth consecutive increase. In comparison, the Farm Credit System experienced about 9.3-percent increase in gross loan volume over the previous year.
“We’re seeing growth from large commercial farming operations consolidating, as well as small part-time operations created, in part, by favorable interest rates,’ he says. “Slightly more than 50 percent of the Farm Credit portfolio of the Federal Land Bank of Mississippi consists of loans to individuals who do not rely completely on farm income to meet their primary financial obligations. There’s great diversity in the individuals who stand behind the agricultural land loans made by the Federal Land Bank Association.”
In addition, asset quality has remained favorable and the ratio of non-performing loans to total loans in only slightly over one percent. Net charge-offs of loans are estimated at nine-tenths of 1 percent of total loans for commercial banks, which is up slightly from the previous year. “Loan losses haven’t been greatly increasing, however because of the economic conditions we are faced with, we are increasing our loan loss reserves,” he says.
The reasons for McRee’s optimistic view of agriculture’s financials are not necessarily all cash-flow based.
A lot of the favorable conditions we have today in terms of loan performance are due to interest rates, he says. “For several years now, because of the Fed’s action, interest rate reductions have created a more favorable borrowing environment for agricultural producers. Certainly we as bankers would like to see commodity prices a lot higher, but we’re very thankful that interest rates are at the lowest level they have been in some 40 years.”
Current interest rate levels, of course, are subject to various economic factors, including the current situation with Iraq looming on the horizon, but McRee is optimistic that relatively low inflation and interest rates should help keep the farm sector strong.
“The economic news continues to be both good and bad, depending on what day you wake up and look at the newspaper. We’ve got a very volatile situation in the world, and in the financial markets. But thankfully, the money markets are remaining fairly steady and low, fueling consumer confidence in the economy,” he says.
Another factor influencing farm liquidity is the price of land.
“Land prices have remained steady, and bankers have remained cautious,” McRee says. “Commercial banks and the Farm Credit System learned a lot of the lessons back in the seventies and early eighties about lending on balance sheets and collateral lending. Those of us who went through that period are very cautious, and more careful about letting someone get over-extended just because they have a strong balance sheet.”
According to McRee, the real estate market has remained strong, with an overall steady to slightly upward trends in land values, which is due in part to low interest rates. “People have money to invest because in many cases they are taking it out of the stock market. There’s capital out there that’s looking for a place to go, and a lot of it is going into real estate,” he says.
Based on current market conditions, interest rates, and overall economic conditions, McRee believes land values will continue to remain steady, and perhaps level off somewhat.
“Land values are not being supported by agricultural cash flow necessarily, it’s just that the economy in general is supporting land values,” he says. “A lot of small tracks of land are being sold as the baby boom generation ages and they are looking to diversify their asset base and portfolios. In a lot of cases, these boomers simply want to own pieces of land somewhere. As a result, we’re continuing to see a strong demand for real estate.”
That’s good news for producers who own land, McRee says, because it’s keeping their financial statements strong, despite increasing input costs and depressed commodity prices.