WASHINGTON, DC – March 10, 2011 – (RealEstateRama) — Banks are successfully managing agricultural loan risk associated with rising farmland prices, said Matthew H. Williams, president of Gothenburg State Bank in Gothenburg, Neb., and vice chairman of the American Bankers Association at an FDIC symposium on U.S. farmland prices held today.
The demand for U.S. farm products world-wide is very strong and continues to grow, and that demand has driven up farmland prices.
“Farmers, especially those who produce crops, are enjoying some of the best profitability they’ve seen in a generation,” Williams said. “As a result, farmers are carrying less leverage today than they did just a few years ago.”
Williams said he and his staff at Gothenburg State Bank have more than 110 years of combined agricultural lending experience, which helps them better measure repayment capacity when evaluating farm real estate loans.
“Managing credit risk is our job,” he said. “Banks that specialize in agricultural lending use conservative underwriting practices. Knowing our customer is a fundamental tenant of our business, and that includes knowing about the enterprise we are financing, understanding how the loan will be repaid and what risks our customer faces.”
Williams said many resources exist to help banks manage farm real estate lending risk. They include: software that allows bankers to thoroughly analyze repayment and stress test their portfolios; a secondary market for agricultural real estate mortgages — Farmer Mac — that enables banks to originate mortgages and then sell them into this secondary market; and the USDA’s Farm Service Agency loan guarantee program that helps banks mitigate repayment and collateral risk.
Bank customers have also changed, Williams said.
“Farmers have a better understanding of the limitations of leverage and have become very sophisticated business people – they utilize crop price risk protection, they hedge input costs, and they avail themselves of other types of risk management tools such as crop insurance.”
The American Bankers Association represents banks of all sizes and charters and is the voice for the nation’s $13 trillion banking industry and its two million employees. Learn more at aba.com.
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