Bankers Restructuring Agricultural Debt Using Real Estate Collateral

(OMAHA, NE) In 2018, the spread between returns to farmland owners and benchmark interest rates narrowed to its lowest level in more than a decade in the Tenth Federal Reserve District. At the same time, farmland sales increased in some states for the first time in several years. Together, the reduced spread and indications of increased sales in some regions suggest the potential for lower farmland values moving forward. According to the Federal Reserve Bank of Kansas City’s Survey of Agricultural Credit Conditions, farm income in the United States declined more than 50 percent, and working capital declined 65 percent over the past four years. Despite these developments, farmland values remained relatively stable, declining only modestly in most areas. The relative strength of farmland values has provided some support for the financial health of farm operators. Despite significant declines in liquidity, farm borrowers have remained relatively solvent, and agricultural lenders have drawn on the value of farm real estate when managing risk in their farm loan portfolios. Over the last three years, 20 to 30 percent of agricultural loans have involved restructured debt. A majority of bankers in the Tenth District have reported using increased debt restructuring or increased use of real estate collateral during the current downturn in the agricultural economy in an effort to continue providing credit to agricultural borrowers. A recent increase in farmland sales in some states suggests a decline in farmland values could be on the horizon. If the trend continues alongside persistently low agricultural commodity prices and higher interest rates, farmland values could decline further.