Home > Fourth Issue 2021 > Community Banks Are Key Partners with Agricultural Producers Despite Reduced Agricultural Lending

Community Banks Are Key Partners with Agricultural Producers Despite Reduced Agricultural Lending
by Christine M. Gaffney, Senior Vice President, Supervision, Regulation and Credit, Federal Reserve Bank of Minneapolis*

Given that agriculture plays a critical role in the Ninth District’s rural economy, local communities, and banking sector, including the part of the Ninth District1 in which I grew up, I have always been drawn to the nation’s dependency on agriculture. With friends and family farming in the Red River Valley over the years, I quickly learned the mantra “If farmers do well, everyone does well.” As I found myself in a career supervising banks — largely community banks with agricultural concentrations — I realized that it wasn’t quite this simple. For context, over 40 percent of the counties in the Ninth District have economies dependent on agriculture. 2 In addition to the farmers and ranchers, the Ninth District’s agricultural economy includes suppliers, services, and many other businesses and people supporting the industry. In the most recent Census of Agriculture, the market value of products created and sold by over 170,000 farm operations in the Ninth District totaled more than $42 billion. 3 This article focuses on the dependencies and interconnections between agricultural producers and community banks, which are both equally critical to the communities they serve.

Although I focus on agricultural-related lending in this article, I believe that I provide a few “seeds” for thought for all community banks to consider in understanding the business needs and market dynamics in their communities as well as sound risk management practices for those involved in agricultural lending.

Agriculture and Banking Are Long-Term Partnerships

Community banks are important, long-term partners with farmers and ranchers (referred to as “agricultural producers” in this article) across the Ninth District.4 Often, these agricultural producers are multigenerational operations with long-term goals that span decades. The agricultural producers need long-term banking solutions with partners who understand their immediate needs during a temporary shortfall and the decades-long goals of each operation.

Most agricultural banks are headquartered in rural counties, which is a great benefit to agricultural producers in the banks’ market areas.5 The proximity of the banks’ headquarters and their lending teams to their customer base allows them to be highly knowledgeable about local market conditions and how industry changes may affect market demand for agricultural products. About half of the 473 community banks headquartered in the Ninth District are considered agricultural banks, and they hold two-thirds of outstanding farm debt in the Ninth District, totaling over $13 billion.6

2020 U.S. Farm Sector Income

Monitoring the financial health of the banking and farming sectors is an important part of our supervision responsibilities. After five years of below-average farm income, the agriculture industry, producers, and bankers were optimistic heading into 2020. Recently signed trade agreements boosted expectations for improved demand for U.S. agricultural products, after several years of weak exports. However, the optimism was short lived, as the COVID-19 pandemic expanded globally and uncertainty gripped global markets. The initial uncertainty caused the prices of major agricultural commodities to fall, prompting prices received by producers to decrease 11 percent in one month.7

The rapid decrease in commodity prices quickly turned the initial 2020 farm sector expectations into what many thought would be the sixth year of lower farm income and worsening agricultural financial conditions. Sinking commodity prices were met with aid packages for the agricultural producers affected by the pandemic, and, just a few months later, the expectations for farm sector income and financial conditions had improved once again. Bankers and industry leaders throughout the Ninth District reported that the aid packages greatly improved the financial condition of agricultural producers affected by volatile commodity prices during the early phase of the pandemic.8

Coupled with the pandemic-related assistance, increased commodity prices helped net farm income surge to its highest level since 2013. During the second half of 2020, despite the ongoing pandemic, commodity prices rallied as commodity supplies dwindled and global demand for U.S. commodities increased. The increase in farm sector income was welcomed by agricultural producers in the Ninth District. Discussions with bankers and agricultural credit conditions survey results indicated that key financial indicators for agricultural producers improved substantially as the producers replenished working capital and reduced debt levels. Although the rapid increase in farm income was a boon to agricultural producers, some agricultural banking experts are concerned that the rapid increase in loan repayment rates and reduced loan demand, if prolonged, could have longer-term effects on the profitability of agricultural banks.

Changing Profile of Agricultural Banks

Rapidly improving financial conditions for agricultural producers in the second half of 2020 led to increased loan repayment rates, reduced loan demand, and decreasing farm debt outstanding at community banks. Using first quarter 2020 and 2021 Call Report data, a year-over-year comparison of agricultural debt outstanding in the Ninth District shows a significant decrease in outstanding loan balances at agricultural banks. Total farm debt outstanding at these agricultural banks decreased by over 16 percent, primarily due to a reduction in agricultural production loans.

A closer look at the loan data, however, shows that the major contributing factor in the decrease of agricultural loans outstanding at agricultural banks is that the number of community banks classified as agricultural banks dropped by 10 percent in the same period. The banks that no longer meet the criteria for an agricultural bank have transitioned back to being community banks with an agricultural loan portfolio below the 25 percent threshold, a quasi-agricultural bank of sorts. These quasi-agricultural banks accounted for approximately $1.6 billion (over 10 percent) of all outstanding agricultural loans in the Ninth District as of the first quarter of 2021. These community banks are important to agricultural producers and surrounding communities because they still hold significant amounts of outstanding agricultural loans and other loans that support businesses in the community. These banks could quickly transition to being agricultural banks again in the future as agricultural producers increase loan demand and the banks’ loan portfolio composition changes.

As overall farm sector income increases, we should expect to see changes in measures of financial performance at both the bank and producer levels. Decreased loan demand at agricultural banks is a concern for the banks’ long-term profitability, but increasing farm loan delinquency rates are also a concern. Understanding the relationship and balance between the two is important for agricultural banks because swings in farm sector income can happen quickly.

Surveys Provide Insight on Farm Income and Loan Demand

Given their familiarity with the local agricultural producers and borrowing base, staff at agricultural banks have detailed knowledge of the agricultural credit needs in their market areas. Each quarter, lenders at agricultural banks in the Ninth District provide insight on the agricultural credit conditions in their market areas by completing the Ninth District Agricultural Credit Conditions Survey. Analyzing the survey results provides valuable information on the current financial performance measures and longer-term trends for the agricultural economy in the Ninth District. The survey results provide valuable insights that help us as regulators to better understand and explain the cyclical nature of the agricultural economy.

The survey responses reveal several important characteristics regarding agricultural lending patterns in the Ninth District. The survey shows that the lending relationships between agricultural banks and agricultural producers center on three important financial measures: farm income, loan demand, and loan repayment rates. Loan repayment rates tend to increase quickly as farm income increases and agricultural producers want to reduce interest expenses and outstanding debt levels. Loan demand tends to decrease slightly as farm income increases, but more gradually than repayment rates. The gradual changes in loan demand reflect the fact that agriculture is capital intensive and producers need baseline levels of working capital and other debt to keep operating efficiently and effectively. Changes in loan demand are also slower to decline because agricultural producers take advantage of high-income years to take on debt to expand operations, update machinery, and pay for higher operating costs.

Consistent Risk Management Practices Expected Regardless of Market Conditions

In 2020, as producers and community banks experienced the up-and-down cycle of the agriculture market, economic conditions and producer financials changed rapidly. Farm income increased rapidly, leading to reduced loan demand and changes in loan portfolio composition. The rapid changes in agricultural market conditions highlight the importance of consistent and prudent risk management strategies regardless of market conditions. Supervision and Regulation (SR) letter 11-14, “Supervisory Expectations for Risk Management of Agricultural Credit Risk,” outlines the supervisory expectations for a community bank’s risk management program.9 These expectations vary based on the community bank’s risk characteristics, complexity, and exposure to agriculture. Following the guidance in SR letter 11-14 allows community banks to apply appropriate risk management practices during times of rapidly changing market conditions, such as those experienced during 2020.


Agricultural producers and community banks have a unique relationship due to the cyclical nature of agricultural production. Farm sector income can vary significantly between operating cycles, creating funding gaps and additional credit needs for operating expenses. Conversely, loan demand can decrease to levels that create concerns about overall banking sector profitability. The 2020 operating year for agricultural producers was like no other.

As I write this, the immediate challenges in the agricultural sector caused by the pandemic appear to be all but over. Another operating year has started and presents new challenges to the agricultural producers in the Ninth District, as they confront production risks both known and unknown. Farm sector income has once again risen to levels that offer profitable production for most agricultural producers. Based on historical agricultural credit survey data, farm income can drop as quickly as it can rise. If that should happen, I am confident that the community banks will be here to serve the agricultural producers across the Ninth District.

* Special thanks to agricultural expert Tait Berg, senior examiner, Banking & Policy Studies/System Analytics, Supervision & Regulation, Federal Reserve Bank of Minneapolis, for assisting with the data provided in this article.

  • 1 The Ninth District covers Montana, North Dakota, South Dakota, Minnesota, the Upper Peninsula of Michigan, and 26 counties in northwestern Wisconsin.
  • 2 See U.S. Department of Agriculture, Economic Research Service, Atlas of Rural and Small-Town America, 2021, available at www.ers.usda.gov/data-products/atlas-of-rural-and-small-town-america.
  • 3 The U.S. Department of Agriculture’s (USDA) National Agricultural Statistics Service (NASS) conducts the Census of Agriculture every five years. The NASS conducted the most recent census in 2017. The most current and historical census data can be found at www.nass.usda.gov/agcensus. The USDA defines a farm as any place that produced and sold — or normally would have produced and sold — at least $1,000 of agricultural products during a given year.
  • 4 Community banks are banks with total assets equal to or less than $10 billion.
  • 5 Agricultural banks are banks where farm production loans and farm real estate loans comprise at least 25 percent of total loans during a quarter.
  • 6 Data were obtained from the Call Report, as of March 31, 2021, for community banks headquartered in the Ninth District.
  • 7 Decreases were measured between March 2020 and April 2020 by Agricultural Prices Received Index values. The index is a broad measure of prices received by producers for crop and livestock commodities. For more information, visit the NASS Prices Survey page at www.nass.usda.gov/Surveys/Guide_to_NASS_Surveys/Prices/.
  • 8 The major federal programs for agricultural commodity producers were the Coronavirus Food Assistance Program (CFAP) and the Paycheck Protection Program (PPP). As of June 30, 2021, the CFAP disbursements to producers in the Ninth District states totaled $4.8 billion. PPP loans outstanding as of March 31, 2021, totaled $1.8 billion at community banks headquartered in the Ninth District.
  • 9 SR letter 11-14, “Supervisory Expectations for Risk Management of Agricultural Credit Risk,” is available at www.federalreserve.gov/bankinforeg/srletters/sr1114.htm.

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