Agricultural borrowers are increasingly concerned about access to credit. Amid economic weakness and a financial crisis, commercial banks have tightened credit standards for various types of loans. While agricultural borrowers may be concerned about credit availability, agricultural lenders are equally concerned about the creditworthiness of agricultural borrowers as the farm economy weakens.Agricultural credit

Jason Henderson

English

Research Papers in Economics

Ag r i c u l t u r A l  cr e d i t  St A n d A r d S  ti g h t e n
By Jason Henderson, Vice President and Omaha Branch Executive
2009
A
gricultural borrowers are increasingly concerned 
about access to credit. Amid economic weakness 
and a financial crisis, commercial banks have 
tightened credit standards for various types of loans. While 
agricultural borrowers may be concerned about credit 
availability, agricultural lenders are equally concerned 
about the creditworthiness of agricultural borrowers as the 
farm economy weakens. 
As the financial crisis deepened, agricultural banks 
outperformed other commercial banks—but they still 
saw their profits decline. Despite questions regarding 
credit availability, commercial banks are extending credit 
to agricultural borrowers at lower interest rates. The soft 
erosion in agricultural loan quality, however, has led 
agricultural lenders to tighten credit standards and shift 
more financial risk to borrowers. 
So l i d , b u t  Fa l l i n g Pr o F i t S  a t  ag r i c u l t u r a l  ba n k S
The U.S. financial crisis has trimmed the profitability 
of agricultural banks and other commercial banks. 
However, agricultural banks performed much better than 
their banking peers. The strongest performance emerged 
from smaller agricultural banks.
Based on Agricultural Finance Databook information, 
the financial performance of agricultural banks weakened 
in 2008.1 The Federal Reserve defines agricultural banks as 
commercial banks with agricultural loans accounting for 
more than 14 percent of their loan portfolio.2 According 
to the Federal Reserve, the average return on assets and 
equity at agricultural banks steadily declined in 2008. By 
September 2008, the return on equity at agricultural banks 
declined to 7.6 percent, and the rate of return to assets 
edged down to 0.8 percent (Chart 1). 
Agricultural bank returns, however, were much 
stronger than returns at other commercial banks. By 
September 2008, returns for all commercial banks had 
plummeted more than 70 percent, with the return on 
equity dropping to 2.86 percent and return on assets 
falling to 0.28 percent.3 Agricultural banks also had much 
stronger performance than other similarly sized small 
commercial banks, those with less than $500 million in 
assets. The return on equity and assets at smaller banks 
was 2.4 and 0.3 percent, respectively, well below the 
returns at agricultural banks. 
Several factors contributed to the dip in agricultural 
bank profits. First, interest rates on agricultural loans 
have declined, trimming gross revenue on loan activity. 
According to agricultural credit surveys from the Federal 
Reserve, interest rates on all types of agricultural loans 
have dropped significantly below 2006 levels.4 The average 
	 	 	 	 	 	 	 	 	 								2009	•	Vol	IV			Issue	Iwidened as LIBOR fell sharply, suggesting some 
improvement in bank profitability.
However, loan delinquencies have edged up, trimming 
agricultural loan profitability. In 2008, delinquency rates 
on agricultural loans climbed steadily from 1.08 percent in 
the first quarter to 1.23 percent in the third quarter (Chart 
3).5 At the same time, net charge-offs on agricultural loans 
rose from 0.12 to 0.19 percent. Delinquency rates and net 
charge-offs on agricultural loans rose faster in the largest 
100 U.S. banks. In fact, at smaller commercial banks, 
delinquency rates on agricultural loans actually declined. 
Delinquency rates and net charge-offs on agricultural 
loans remain well below other types of loans and 
help explain the relative strength of agricultural bank 
interest rate on operating loans dropped from more than 
9.0 percent in 2006 to 7.0 percent in the fourth quarter of 
2008. During the same time, the average rate on farm real 
estate loans fell from roughly 8.5 percent to 6.75 percent.
A rise in the cost of capital also squeezed bank 
profits. One measure of the cost of funds is the London 
Inter-Bank Offered Rate (LIBOR), the rate banks 
pay to borrow funds from other banks in the London 
money market and a benchmark for other short-term 
interest rates. In September, the financial crisis fueled 
a spike in LIBOR, which raised the cost of funds for 
banks. The spread between the interest rate paid to 
acquire funds (LIBOR) and the interest rate earned 
on agricultural loans narrowed, suggesting lower profit 
margins (Chart 2). In the fourth quarter, the spread 
page 2
ch a r t  1
av e r a g e  re t u r n  o n  eq u i t y  a n d  aS S e t S a t  co m m e r c i a l  ba n k S  (th i r d  qu a r t e r )
Source: Board of Governors of the Federal Reserve and FDIC 
Agricultural banks are banks with agricultural loans accounting for 14% or more of their loan portfolio. Small commercial banks are banks with less than $500 million in assets.
0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
Agricultural
Banks
All Commercial
Banks
Small Commercial
Banks
2006
2007
2008
Percent 
0
2
4
6
8
10
12
14
Agricultural
Banks
All Commercial
Banks
Small Commercial
Banks
2006
2007
2008
Percent  Return on Equity Return on Assets
ch a r t  2
ag r i c u l t u r a l  lo a n  in t e r e S t ra t e S  a n d  libor
Source: Federal Reserve Bank of Kansas City
ch a r t  3
ch a r g e -o F F S a n d  de l i n q u e n c y  ra t e S  o n  
ag r i c u l t u r a l  lo a n S
Source: Board of Governors of the Federal Reserve System
2000 2001 2002 2003 2004 2005 2006 2007 2008
Percent of Loans
0
2
4
6
8
10
12
0
2
4
6
8
10
12
Ag Operating Loan Rate
Ag Real Estate Loan Rate
LIBOR – 3 Month
2000 2001 2002 2003 2004 2005 2006 2007 2008
Percent of Loans
0.0
0.6
1.2
1.8
2.4
3.0
0.0
0.2
0.4
0.6
0.8
1.0
Delinquency Rate
(Left Scale)
Charge-Offs
(Right Scale)quarter, with increases to both the crop and livestock sectors. 
While banks still made loans, they adjusted loan 
terms in response to the increased risk associated with 
farm lending. The average risk rating on agricultural 
loans edged up in 2008, and bankers continued to report 
deteriorating loan quality as livestock profits were elusive 
and margins declined for the crop sector.9 And carry-over 
debt appears to be rising, as more agricultural bankers 
reported an increase in operating loan renewals and 
extensions in the fourth quarter. In response to higher 
risk, banks reduced the length of operating loans. For 
example, after steadily rising since 2001, loan maturity on 
agricultural loans dropped 20 percent, to 12 months, in 
the fourth quarter of 2008. Simply put, as agricultural risk 
increased, banks were more reluctant to extend loans for 
longer periods of time. 
ri S k S  t o  ag r i c u l t u r a l  le n d i n g  in 2009
The recession poses many risks to agricultural lending 
in 2009. In terms of supply, the further deepening of the 
financial crisis could limit funds for agricultural loans. At 
the same time, a weaker farm economy could erode the 
creditworthiness of agricultural borrowers when loan needs 
are most pressing.
A primary risk to agricultural lending is the 
availability of funds. Banks can raise funds from a variety 
of sources—equity and debt markets, deposits, and 
nontraditional sources such as Federal Home Loan Banks. 
A deeper financial crisis could threaten a bank’s ability 
profitability. For example, the delinquency rate on all types 
of loans and leases was 3.65 percent in the third quarter 
of 2008, almost triple the rate on agricultural loans. Net 
charge-offs were 1.46 percent, more than seven times the 
size of net charge-offs on agricultural loans. 
im P a c t  o n  ag r i c u l t u r a l  le n d i n g
Despite their relatively strong performance, 
agricultural banks tightened lending standards to preserve 
capital and manage the risk arising from the economic 
downturn. Agricultural banks continue to originate 
agricultural loans at relatively low interest rates. However, 
banks are increasing collateral requirements and shrinking 
loan maturity as agricultural loan quality deteriorates. 
Agricultural banks, in general, report ample funds 
available for operating loans. For example, according to 
the agricultural credit survey of the Federal Reserve Bank 
of Kansas City, 70 percent of bankers reported the amount 
of funds available for farm operating loans in the fourth 
quarter of 2008 was unchanged from the year before, with 
an additional 14 percent having more funds available. And 
these banks expected to have roughly the same amount of 
funds available in the first quarter of 2009. Moreover, only 
4 percent of the bankers reported refusing a loan due to a 
shortage of funds, the same percent as in 2007. 
Nevertheless, agricultural bankers responding to the 
Kansas City Fed’s agricultural credit survey reported raising 
collateral requirements on operating loans.6 In the fourth 
quarter of 2008, the collateral requirements index rose 
almost 20 percent above year-ago levels (Chart 4).7 Other 
Federal Reserve data indicate that farm real estate accounted 
for roughly 17 percent of the collateral used for the nation’s 
farm operating loans in the fourth quarter of 2008, up 
modestly from previous years. The use of farm real estate 
as collateral was more prevalent in larger operating loans. 
Moreover, small and mid-sized banks tended to use farm 
real estate as collateral more often than larger banks.8 
The increase in collateral requirements does not appear 
to have severely restricted loan activity in the agricultural 
sector. In fact, farm debt levels rose through 2008. By the 
third quarter of 2008, farm debt held at commercial banks 
was 8.2 percent above year-ago levels, with real estate debt 
up 10 percent and non-real estate debt up 6.3 percent. The 
volume of non-real estate loans rose sharply in the fourth 
page 3
ch a r t  4
co l l a t e r a l  re q u i r e d o n  ag r i c u l t u r a l  oP e r a t i n g  
lo a n S  in te n t h  Fe d e r a l re S e r v e diStrict
Source: Federal Reserve Bank of Kansas City
2000 2001 2002 2003 2004 2005 2006 2007 2008
Diﬀusion Index
100
105
110
115
120
125
130
135
100
105
110
115
120
125
130
135page 4
to raise funds from nondepository sources. For example, 
some large agricultural lenders have struggled to raise 
debt capital by issuing commercial paper. After peaking in 
November 2007, the volume of commercial paper issued 
by domestic financial institutions had dropped roughly 15 
percent by the fourth quarter of 2008. Moreover, equity 
values of larger banking institutions have fallen, which also 
limits their ability to raise capital. 
 Bank deposits are a major source of loanable funds 
for agricultural banks. The risk is that lower interest rates 
on CDs and other savings vehicles could slow bank deposit 
growth, limiting funds available for agricultural loans. 
Through the third quarter of 2008, domestic deposits at 
agricultural banks remained above 2007 levels, according 
to the FDIC. Still, rising job losses from the recession pose 
a risk to deposit growth because people could lose their 
income stream and tap savings for household needs. In turn, 
fewer deposits could limit funds for agricultural loans.
Despite these risks, smaller agricultural banks have 
access to federal government and Federal Reserve funds. 
In response to higher risk, agricultural bankers indicate 
they are increasing their use of guarantees from the 
U.S. Department of Agriculture’s Farm Service Agency. 
Moreover, small agricultural banks have access to primary 
and secondary credit funds through the Federal Reserve’s 
discount window and have the ability to request funds for 
seasonal credit, especially during the planting and harvest 
seasons, when funding needs are more significant.10 
Another pressing concern is the creditworthiness 
of agricultural borrowers. In 2009, profit margins for 
crop producers are expected to narrow, and profitability 
for livestock producers is expected to remain elusive 
(Henderson and Akers). While loan defaults remain 
low, delinquency rates, charge-offs, and risk ratings are 
rising, and continued deterioration in the agricultural 
economy could further erode the creditworthiness of 
agricultural borrowers. Further weakness in agricultural 
loan quality could lead to additional tightening of 
lending standards and an increase in loan denials for 
agriculture.
Also, the expected decline in agricultural income 
has contributed to softer farmland values. Agricultural 
credit surveys from the Federal Reserve indicate that 
farmland values edged down in the fourth quarter 
of 2008. Farmland is a major source of collateral for 
agricultural loans, especially for smaller agricultural 
banks. The decline in farmland values could shrink the 
amount of collateral available for agricultural loans.
In sum, the financial crisis and resulting recession 
have dimmed economic prospects for the agricultural 
economy and trimmed profits at agricultural banks. 
Still, agricultural banks have performed much better 
than other commercial banks and appear to have 
funds available for agricultural loans. However, 
a steeper downturn in the agricultural economy 
could erode the creditworthiness of borrowers and 
further tighten credit standards on agricultural loans. 
With the combination of weaker profits at financial 
institutions and rising risk on agricultural loans, 
agricultural borrowers are being asked to accept 
more of the financial risk emerging from a volatile 
agricultural environment. en d n o t e S
1  Unless otherwise noted, statistics on agricultural bank 
performance and agricultural lending were obtained from 
the Federal Reserve’s Agricultural Finance Databook, www.
federalreserve.gov/releases/e15/default_2008.htm.
2  Agricultural banks have an agricultural loan concentration 
higher than the average agricultural loan concentration 
for all commercial banks. In 2008, the average agricultural 
loan concentration was 14 percent.  
3  Commercial bank statistics are obtained from the 
Federal Deposit Insurance Corporation (FDIC), www.
fdic.gov/bank/statistical/index.html. The FDIC identifies 
agricultural banks as those with 25 percent of the loan 
portfolio concentrated in agricultural loans. As a result, 
the FDIC cohort of agricultural banks is limited to 
smaller banks than the Federal Reserve definition. Their 
return on assets and equity dropped to 1.01 and 9.21 
percent, respectively, by the end of the third quarter, 
slightly stronger than the returns on Federal Reserve 
agricultural banks, suggesting that smaller agricultural 
banks are outperforming the mid-sized agricultural banks. 
4  Data obtained from Federal Reserve agricultural credit 
surveys can be obtained from the Agricultural Finance 
Databook, www.federalreserve.gov/releases/e15/default_2008.
htm, or from the Federal Reserve Bank of Kansas City, 
www.kansascityfed.org/agcrsurv/agcrmain.htm.
5  Charge-off and delinquency rate data were obtained from 
the Board of Governors of the Federal Reserve, www.
federalreserve.gov/releases/chargeoff.
6  Commercial banks have also tightened credit standards on 
other types of loans. According to the Senior Loan Officer 
Survey conducted by the Federal Reserve, commercial 
banks, in general, have tightened credit standards on all 
types of consumer and business loans (commercial real 
estate and C&I loans). Over 80 percent of commercial 
banks reported tightening credit standards for mortgage, 
consumer installment, credit cards, commercial real estate 
and C&I loans in 2008. 
7  Bankers indicated whether collateral requirements during 
the current quarter were higher than, lower than, or the 
same as in the year-earlier period. The diffusion index 
number was computed by subtracting the percent of 
bankers who responded “lower” from the percent who 
responded “higher” and adding 100.
8  Small and mid-sized farm lenders had less than $25 
million in farm loans. Large farm lenders had more than 
$25 million in farm loans. See the Agricultural Finance 
Databook for a more detailed description.
9  See Henderson and Akers (2009) for a summary of farm 
profitability in 2008.
10 More information on the Federal Reserve’s discount 
window and seasonal credit program is available at www.
frbdiscountwindow.org/index.cfm.
re F e r e n c e S
Agricultural Finance Databook, Board of Governors of the 
Federal Reserve System, www.federalreserve.gov.
Henderson, Jason and Maria Akers (2009). “Recession 
Catches the Rural Economy,” Economic Review, Federal 
Reserve Bank of Kansas City, First Quarter.
“Statistics at a Glance,” Federal Deposit Insurance 
Corporation (FDIC), www.fdic.gov.
Survey of Agricultural Credit Conditions, Federal Reserve 
Bank of Kansas City, www.kansascityfed.org/agcrsurv/
agcrmain.htm.
page 5

Agricultural credit standards tighten

http://www.kansascityfed.org/Publicat/mse/MSE_0109.pdf

Agricultural credit standards tighten

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