Ag Bank Mergers Exacerbate the New Farm Crisis
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Last year, the Nebraska Rural Response Hotline, which connects farmers and ranchers with legal, financial, and mental health services, set four monthly records for the number of new callers in financial distress. This spike reflects the broader hardship facing rural Americans in the midst of what some are calling the new farm crisis.
The crisis has many causes, including falling commodity prices and the rising cost of farm inputs like seed and fertilizer. But another contributing factor that is already making the consequences of these deteriorating fundamentals far more severe is the massive consolidation of ag lenders that has occurred since the last farm crisis in the 1980s.
Grain and dairy farmers, in particular, depend on annual operating loans, which can be more than $1 million dollars, to pay for their upfront costs. But according to Joe Schroeder, an advocate with Farm Aid who takes calls from farmers in crisis, “it’s getting tighter and tighter across the board for people depending on operating loans,” to the point where accessing credit “becomes an annual nightmare.”
Farmers are finding it harder to get new loans due to their declining income and mounting debt. But another cause is the displacement of local agriculture banks by large distant lenders with which farmers have no personal relationships.
“So many banks have consolidated that the local bank is not locally owned, it’s just a branch of another bank,” says Vern Jantzen, Vice President of the Nebraska Farmers Union. “In the old days there was a relationship there, the banker knew how this family was operating and he could figure out if this is a good risk or not, but all of that is gone.”
The ag credit landscape is made up of commercial banks, government-sponsored enterprises called the Farm Credit Service and Farmer Mac, and “loans of last resort” from the USDA Farm Service Agency. In 2016 the FCS held nearly 41 percent of all farm sector debt while commercial banks held 42 percent.
Both the FCS network and the commercial ag banking sector have become increasingly consolidated since the 1980s farm crisis. In 1983 the FCS included nearly 900 lending associations organized into 12 regional districts. Today there are only 80 associations housed within just 4 large FCS regional banks.
On the commercial side, the number of agricultural banks has shrunk nearly in half since 1979, from 4,365 to just 2,316. Rural community banks with less than $10 billion in assets still finance roughly three-fourths of all commercial farm loans, but they too are disappearing. The number of community banks has declined from roughly 16,000 in 1984 to just around 6,000 in 2014.
The farm crisis of the 1980s caused some of this consolidation, as local banks weakened by overexposure to farm debt were bought out by stronger, larger, more diversified institutions. Yet consolidation continued through the ‘90s even after rural bank failures became relatively rare. Last year, the chairman of the Farm Credit Association, Dallas Tonsager, raised concerns that the FCS “could be left with too few banks” and called on the agency to “reflect more closely on the reasons and ramifications for mergers.”
As FCS and commercial banks merge, they lose regional autonomy and some flexibility to work with ailing farmers. “The community bank lives in the community,” explained Mark Scanlan, senior vice president of agriculture and rural policy for the Independent Community Bankers of America. “They can make decisions there at the bank locally, they don’t have to send it to a regional or corporate office in some city far removed from the borrower.”
But more rigid and centralized decision-making leaves farmers increasingly feeling like they have no more lifelines to grab onto. “In every case consolidation works against the farmer,” says Schroeder, “a big bank is not going to buy a slightly smaller bank network and not cut down on a number of red loans they’ve got, the only direction in consolidation is efficiency.”
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