A RAPIDLY GROWING debt crisis is looming across this nation's farm belt, one that threatens the very existence of hundreds of American banks and thus poses great dangers to the national financial system. Already, banks in rural America are failing at a higher rate than at any time since the Depression. But little has been done to cope with this problem.
The farm debt problem has been building since 1980-81. During these few years the value of farm land, farm machinery and other capital assets has plummeted by nearly a third nationwide, and by 50 percent or more in some locations. Of an estimated total farm debt of $215 billion, about $60-70 billion is owed by farmers whose debt exceeds 70 percent of their total assets. These people are the ones who would have to sell out if forced to meet ther obligations at current payment schedules. If a wave of liquidations happened, land prices could collapse, and the money the acreage brought might not be sufficient to pay off the banks.
Agricultural banks were not pushed to the breaking point in abnormally large numbers until the middle of 1984. Twenty-two of the 40 banks that failed since June 15 were agricultural banks; they had an average of 53 percent of their total loans in agricultural credits. Most of them are located in the Great Plains states: five in Nebraska, four in Kansas, three in Iowa, two each in Oklahoma and Colorado. The rest were scattered elsewhere.
These numbers could balloon in 1985. There are about 4,300 U.S. banks that have at least 25 percent of their loan portfolios in agricultural loans, and 1,700 with 50 percent in farm loans. There are also about 850 local production credit associations and land bank associations in the federal Farm Credit System which specialize in agricultural lending. Seven of those local farm credit institutions are currently in liquidation -- the equivalency of a commercial bank failure.
As long as "slack" remained in the overall credit system, banks and farm credit institutions could use a number of techniques to hold off trouble. They could consolidate farmers' short-term debt into longer-term obligations with lower payments. Credit institutions holding long-term debt secured by land and other fixed assets often "subordinated" their position to a bank which extended short-term operating credit to the same farmer, giving that bank priority access to the farmer's marketing receipts. This practice enabled farmers to secure annual operating capital, and at least postpone the liquidation of fixed assets.
Creditors have often practiced "forbearance" and in effect tolerated a farmer's inability to repay a loan on schedule, as long as the loan remained adequately collateralized. That was possible for a while after farm capital assets began to decline in value, partly because banks often required farmers to put up collateral substantially higher than the loan itself.
But such techniques are fast becoming impossible, as the agricultural credit systems is now tightening almost exponentially. Most ominous of all, the value of farmers' principal asset, their land, may be headed for further dramatic declines. According to Federal Reserve Board economist Emanuel Melichar, the total value of American farmland grew by $465 billion (in 1983 dollars) from 1971-79, and fell by about $149 billion from 1980- 83. He says that the remainder of the gains made in '71-'79 may be wiped out in the years ahead as prices for farmland continue to fall.
The arithmetic explaining an agricultural bank's solvency threshold is rather simple. Assume a situation that would be roughly typical for perhaps 1,500 banks across the farm belt.
The bank has $100 million of deposits to invest in loans and other assets (such as municipal bonds). Of this $100 million, about $36 million is loaned out to some 200 farmers -- an average debt per borrower of $180,000. The bank is capitalized at 9 percent of deposits, or $9 million, which is $3.5 million more than the minimum required by the regulatory agencies (5.5 percent of assets). This cushion against losses consists mainly of funds accumulated over the years from earnings and the bank's common stock.
If 20 of the bank's $180,000 farm loans are classified by the regulators as unlikely to be collected, they would be treated as losses. But subtracting $3.6 million from the bank's $9 million in capital would wipe out the bank's cushion and bring it below the legal minimum. At that point the bank is legally subject to closing unless corrective action is taken.
Since the average capital level of the approximately 4,300 agricultural banks is about 9 percent of assets, the bank has, in effect, borrowed $10 out of every $11 it has loaned or invested. That makes it extremely difficult for the banks to withstand a run of farm failures among their customers. Even if a bank wants to be indulgent, it has to worry about its own creditors, who are unlikely to be so sympathetic.
Just as the situation is getting really perilous for the banks, however, the government agencies that might alleviate the situation are either tending to withdraw from involvement or to clamp down rather precipitously.
The Federal Deposit Insurance Corp. and the comptroller of the currency have increased regulatory pressures on banks for downward reappraisal of farmland and pushed for classifying more farm loans in "problem" categories. The Farmers Home Administration has basically closed its loan window as "lender of last resort" to commercially financed farmers who are in trouble. The secretary of agriculture is advocating a "free-market" approach to basic agricultural policiesthat would allow the USDA to sidestep the responsibility for helping to stabilize the receding agricultural economy.
These government policies all accentuate the negative psychology in the agricultural sector.
FDIC Chairman William Isaac said recently that the bank regulators' list of about 800 "problem" banks is growing because agricultural banks are being added faster than non- agricultural banks are being taken off. Chairman Isaac added, however, that the growing difficulties among farm banks do not pose a "threat" to the banking system as a whole.
The implication is that there are much larger problems to be concerned about. But what about the circles of misery and disruption engulfing local communities when an agricultural bank fails? What if the gathering crisis in 1985 forces widespread liquidations, inundating the weak markets for farmland in a dozen states and carrying in its wake hundreds of additional bank failures?
This gathering crisis deserves the kind of highest-level, concerted attention which has been devoted to the foreign debt crisis. Instead of preaching "free market," the government should be facing up to its responsibilities. The crippling impact of budget deficits on our farm economy must be faced. The government cannot avoid its responsibility to provide essential direction to balance production of farm commodities and demand for them.
There is no serious prospect that the agricultural economy can "grow its way" out of the current debt crisis through export expansion. A multiyear agricultural stabilization policy should be negotiated and enacted by Congress in 1985, when the farm bill has to be rewritten.
Yes, the agricultural sector does face a serious "shakeout" -- an inevitable consequence of the excesses of the '70s, when inflation took control of our farm sector and distorted it wildly. But the shakeout must be managed with great care, or else the repercussions will be felt far beyond the small rural communities whose banks are now in trouble.