The boom in agriculture lending may be coming to an end.

For several years, strong borrower demand and low delinquency rates have delivered welcome profits to credit unions and banks that target the farming industry. But commodity prices are falling in many areas — the price of corn in some cases falling from more than $7 per bushel to less than $4 today — depressing farmers' incomes and forcing many financial institutions to increase their monitoring of credit trends.

The Department of Agriculture is forecasting that net farm income will drop nearly 32% this year compared with the agency's 2014 estimate, to $73.6 billion. This would be its lowest level since 2009 and the second straight year with a significant decline.

The gloomy forecast from the Department of Agriculture is consistent with what Denton Zubke, CEO at $269 million Dakota West CU in Watford City, N.D., has seen. Somewhere between 65-70% (about $102 million) of Dakota West's portfolio is impacted by a drop in commodity prices, either directly or indirectly.

"Last year the grain prices obviously went to heck and we saw a significant drop in revenue on our grain farmers," he told Credit Union Journal. "We also have farmers who [have both livestock and grain] and what we saw last year is what they were losing on the grain they were making up on the livestock, so in essence they kind of broke even, depending on what percentage was where."

Zubke said his CU is "forecasting a significant loss again this year on the grain side, but not on the livestock. Unfortunately I think we're going to see enough losses on the grain side that I don't think even the livestock side is going to hold that up for some of those that are split."

Jeff Zimmer, a loan officer at $89 million-asset Farmway CU in Beloit, Kan., said the recent growth in ag lending is because "livestock prices have increased dramatically over the last couple of years, and land prices over the last 10 years have really increased in value. But they're starting to level off now, so we're not seeing increases like we were. They've probably gone down a bit, but the farm ground is selling pretty well for what it is and what is has compared to in the past."

About 47% of Farmway's lending portfolio is tied to agriculture, about half of which is real estate lending, whereas the rest is diversified throughout the sector into areas such as livestock, operating loans, and more.

Times Are Tough

For borrowers whose business is primarily crops, times are tough.

"A lot of them were getting heavy into corn planting," said Zimmer, "and we just haven't had the moisture like we've needed the last few years to have dry-land corn, so it's just not profitable anymore to even try to plan, because the input costs are so expensive and the price of the commodities are so low that they're not going to make any money unless they have crazy good yields."

Dakota West, Farmway and other CUs have already moved forward with helping members restructure loans in order to avoid delinquencies.

"What we have to do a lot of times is look to put some of that debt toward longer term," said Zimmer. "All of them have crop insurance and get government payments and disaster insurance, but that doesn't always come right away, so we have to restructure some of that short-term debt to longer term until hopefully prices come back or they actually have a crop, because they're not making money if they don't have a crop."

Zubke said his CU as "a few" delinquencies in its ag lending portfolio, "but nothing significant at this point." What's more concerning, he said, is what happens this fall when the harvest comes.

"They know what they've got for yields and they know what those prices are, and a lot of them do not have the storage capacity to store those crops, so they immediately have to go and be sold, and so all of a sudden we'll be dealing with a lower crop income, which will have a significant impact on our loan portfolio," he said.

Farmway's Zimmer pointed out that his credit union — and many other ag lenders — doesn't do much in the way of lending for machinery purchases such as tractors and combines. Not only do members get better financing at the dealerships, but it also helps the credit union with risk mitigation, he said.

Zimmer's ag lending portfolio "is rarely delinquent, just because of the relationship we have with our borrows on the ag side," he said. "It's way more intensive than the average car loan. We'll make a car loan and see them again three years later, but our ag borrowers, sometimes we talk to them daily." Farmway reps are also regularly out at members farms for inspections and appraisals or just to do a financial work-up, he said, and it's that kind of relationship that has attributed to low delinquencies.

The Insurance Factor

One change some CUs have instituted for agriculture lending is making farm insurance a requirement. Multiple kinds of coverage are available, including crop insurance to protect if a yield doesn't come in as planned or as priced, or with revenue protection, which pays if the projected price of a commodity drops, or hail or catastrophe insurance, which protect crops from weather-related issues.

Dianne Jentz, VP of business lending at $230 million Madison, Wis.-based Heartland CU, said she does not know of any credit unions that sell crop insurance. Most Heartland members, she said, purchase it from an independent insurance agent.

"Twenty years ago, my dad never had [crop insurance] on the farm," recalled Jentz, "but 10 years ago my dad wouldn't dream of not having it." Her father, a dairy and cash crop farmer now in his seventies, sold his dairy interests in 2006 and now rents out his land for crop farming.

But Dakota West's Zubke said that even though farmers are accustomed to the peaks and valleys of their industry, crop insurance presents its own problem.

"When we have lower ag prices like this, it not only affects what [farmers] might get for sales from those commodities, but their safety net, which is crop insurance, is also reduced significantly," he said. "Because that's based on the price of wheat, grain, corn, soy beans, et cetera, so not only do they have to worry about the fact that their commodities aren't going to sell for what they probably should to produce an operating profit, but they also have to worry about if they have a significant disaster — let's say it doesn't rain or let's say they have planning problems — now even the insurance isn't going to cover a lot of their operating costs either. It really becomes a significant problem."

Rent vs. Own

One other major problem facing the farming industry, said Heartland's Jentz, is the price of land. Many farmers rent the ground they work on, and Jentz explained that as the price of corn went up, so did the cost per acre for rentals.

"Everybody wants a piece of the pie, because they know the farmers are making money, so they increase the rent," she said. "And guys could afford to pay more in rent because obviously they're getting more per acre as far as profits. But they might have landed three- to five-year contracts at these higher rents and... we've seen these contracts go bad because farmers can't afford to pay them."

Very few farms in the region Heartland serves are renting acreage for less than $200 per acre these days, said Jentz, and a few years ago some rents were going for as much as $500 per acre.

"They're starting to fall back some, but they haven't fallen back to the levels that we were prior to our $7 corn era," she said.

The "rent or own" quandary is crucial for many credit unions hoping to help their members restructure debt, since many programs offered rely on the member's equity. But Zubke said that an equity position can only take members so far.

"I think we're in a pretty good position in that most of these people have some equity that we will be able to use as long as this is a short-term cycle — no longer than this year and last year," he said. "If this extends another year beyond that, we will have significant problems, and we will not be the only one."

So just how long will the bad times last? Heartland Jentz said it's likely that this will be at least a two- to three-year cycle — if not longer.

"Last year wasn't as bad as this year's going to be," she said. "I don't think we're halfway through it. I think we'll for sure see another two years. Even if this is year two, this is the start of year two."

— Jackie Stewart contributed to this article.

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