A recent report from the Federal Reserve Bank of Minneapolis drew many parallels between the banking conditions during the 1980s and the current banking condition. Although these two situations are very similar, small differences could make or break it for some agriculture banks.

During the 1980s, many ag banks failed because they were not properly structured for a decline in grain or land prices. As defined by the FDIC, an ag bank has more than 25% of its loans to farm operations or secured by farmland. Many factors led up to the farm crisis of the 1980s, including rising grain prices. Grain prices increased quickly between '72 and '74 and they also soared from '06 to '08, tripling at times.

In 1982, the substantial decline in commodity prices hurt farm profits. Farmland prices also declined as a result of lower farm profits and grain prices. In 2008, many areas in the U.S. saw the highest farmland prices on record.

The differences

Some differences between the ‘80s and current times do not lead to failure. These variations include:

• Debt to asset ratios - Although debt to asset ratios are following some of the same trends as in the ‘80s, current debt to asset ratios are considerably lower. At the end of 2008, farm debt to assets sat at 9.78% nationally, in the late ‘70s it was 19.33%.
• Bank capital - Many banks define their strength on the amount of capital they have. The more capital, the greater chance the bank has to weather an economic storm. Currently bank capital is 50% higher than in the late 1970's and it is still on the rise.
• Farmland secured loans - Historically, bank loans that are secured by farmland are safer than farm operating loans. Today, farmland secured loans have increased up to nearly 40% of ag bank loans compared to 10% in the ‘80s.
• Portfolio increases - During the ‘70s leading up to the farm crisis, ag banks were expanding their portfolios 20% per year. Currently, ag banks have taken a more conservative approach and have grown slower.

Similarities before the farm crisis of the 80s that could lead to crisis include:

• Non-federal guaranteed securities - Failed ag banks of the ‘80s carried security portfolios higher in non-federally guaranteed investments. Currently the trend has risen consistently across the banking sector.
• Lending outside of ag - Banks in the ‘80s were expanding so fast by broadening their horizon of primary specialties. Presently, many ag banks have expanded into commercial and industrial as well as in commercial real estate. The rate at which these current ag banks are widening their specialties has recently flattened out, but is certainly something to watch out for, especially the large exposure to commercial real estate.

Future of ag banks

It's hard to say whether or not ag banks could survive a farm crisis the caliber of the 1980s. Ag banks of today have certainly prepared better by having conservative mind sets. On the other hand, it's difficult to look at bank security portfolios invested in non-federally guaranteed investments.

Many other factors have changed since the previous farm crisis as well. The biggest is demand for ag products, which has increased substantially. Food demand has is at record levels and supplies are at multi-decade lows.

The only certainty is that the future will be interesting.

 

-  Colvin