Some sectors will continue to struggle with high debt, tight credit.
A year ago, almost every ag market was steeped in volatility, heightening risks for ag lenders. So, they tightened credit standards.
Now, as "new profit opportunities in the farm sector emerge," there's speculation surfacing about whether those credit standards will return to pre-2009 levels.
Last year, ag banks actually outperformed their general commercial peers, according to Omaha Federal Reserve Bank Branch Vice President Jason Henderson.
"At agricultural banks, the average rate of return to assets and equity fell to 0.6 and 5.5, respectively," he says. "In contrast, other small commercial banks reported negative returns to assets and equity. During the entire year, less than 10 agricultural banks failed, while closures of commercial banks soared to 140."
That relative good health, Henderson says, led ag banks to support more low-interest farm loans. Then, along came a trend of declining farm incomes, and the picture changed dramatically.
"Declining farm incomes in 2009 depressed repayment rates and raised delinquency and charge-off rates on agricultural loans," Henderson says in a recent report. "As a result, commercial banks have tightened credit standards by maintaining elevated collateral requirements and stringent loan terms."
So, will this picture change in the next year? Credit standards will probably remain at their current high levels. But, with the farm profit picture looking a little better this year -- as well as an improved general economy -- credit should become more readily available in general.
"Profitability shapes credit availability, and stronger farm incomes in 2010, coupled with a resurgent global economy, should help improve access to credit as the year progresses," Henderson says. "With improved profitability, farm debt levels could remain low, further enhancing credit access."
That's not true for everybody in agriculture, however; those with "weak profit opportunities and high debt levels" will still face tough credit conditions through this year. "Many livestock operations, in particular, could confront a stiff challenge," he adds.
Others in the higher-debt category, Fed data indicates, include large farms, livestock operations and those farms owned by "young and less experienced farmers." That's because the data shows these groups remain with higher debt ratios.
"Larger farming operations tend to have higher levels of debt. Livestock operations also have higher debt use in recent years due to shrinking profit margins," Henderson says. "Operations owned by young and less experienced farmers also tend to have high debt levels, as they are typically still financing the initial start-up costs of a farm operations."
"The livestock sector could face the most difficulty obtaining credit," he continues, looking ahead to the remainder of 2010.
"Dairy, hog and cattle feeding enterprises operated in the red for most of 2009, as livestock prices remained well below costs of production. Losses are expected to narrow in 2010 as USDA projects livestock prices to rise amid stronger demand and shorter supplies."
Though he admits the overall trend tends to mask some of the lingering risk in these specific sectors, Henderson adds 2010 should still be a year of overall improvement in ag credit conditions.
"Overall farm debt levels remain near historical lows, and a rebound in farm profits should bolster farm income statements and balance sheets," he says. "A farm rebound, spurred by a global economic recovery, could open credit flows and foster additional investments in U.S. agriculture."