Research & Data

Impacts of bank consolidation ‘mixed’: Farmer Mac

Farmer Mac’s quarterly agricultural outlook noted a decline in community banks from 15,000 in the mid-1980s to approximately 5,000 today, attributing it largely to consolidation among community and agricultural banks.

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Despite a roughly two-thirds decrease in the number of US community banks since the 1980s, the impacts on farmers have been muted compared to the debt crisis that plagued farmers during that era, Farmer Mac said in a report released Monday.

In the Winter 2016/2017 edition of The Feed, Farmer Mac noted that the number of community banks has declined from 15,000 in the mid-1980s to approximately 5,000 today, attributing much of this to consolidation among community and agricultural banks (defined as those with total assets less than $100 million).

“In the past six years alone, over 1,000 [43 percent of] banks with assets less than $100 million have exited the market, the clear majority of them through mergers and acquisitions,” according to the report, which attributed the consolidation both to rising costs and inefficient use of capital.

But the impact on farmers are “is likely mixed, as they will have fewer lenders to choose from but each one will have a higher individual lending limit,” it states.

While the report notes that both debt-to-earnings and interest-expense-to-earnings ratios are climbing in the agricultural sector, it stresses that the situation today does not match the duress seen in the mid-1980s.

Especially important is the fact that 72 percent of year-end farm operator debt is on a fixed interest rate, and so will see only limited impact of expected interest rate hikes. Even in the extreme case of a 300 basis point increase, interest expense to cash flow ratios would remain at just half of levels reached in 1983.

The report goes on to address government policies, weather changes and other economic factors likely to shape the fortunes of US farmers.

Recent “dramatic” improvement in drought conditions throughout California and increasing dryness in the south east could impact crop planting and the development of tree-based crops, while there is potential for localized flooding and poor planting conditions in North Dakota as significant snowpack begins to melt.