Northwest Farm Credit Services expects its loan portfolio to grow moderately in 2019, by around 5 percent, and other agricultural lenders expect loan volumes to meet or slightly exceed 2018 levels.

“We are still very bullish about Northwest agriculture for the long term,” Northwest FCS President and CEO Phil DiPofi said.

Loan volume could rise a bit in 2019 based on producers borrowing more to grow their operations or to cover wider gaps between lackluster commodity prices and rising input costs. While low prices for milk and some other commodities increase repayment risk, the Northwest’s wide range of crops helps spread that risk.

“One thing about our portfolio is that it is very diverse,” said Bill Perry, executive vice president for lending and insurance for Northwest FCS. “The largest concentration of any one commodity is about 12 percent of our portfolio.” 

At Spokane-based Northwest FCS, a cooperative, larger borrower categories include dairy, fruit and tree nuts, forest products, cattle and livestock, and row crops, he said. Small grains are in the next tier, around 6.5 percent of the loan portfolio. Northwest also has timber and fishery clients.

“Though some industries are struggling with market prices, such as dairy, in general our customers experienced a profitable ’18,” DiPofi said. Many in recent years streamlined operations, and effectively used futures and other financial tools, he said.

Ag borrowers in 2019 could be impacted by higher interest rates and trade uncertainty.

Trade issues, DiPofi said, “so far have not impacted the majority of our customers, but clearly have the potential for disruption if something were to occur in a global context. Barring that, we expect next year to be generally similar to what we have experienced in 2018.”

The Federal Funds Rate, which banks charge each other overnight, stood at 2.25 percent annually at the end of November, up from 1.25 percent a year earlier. The Wall Street Journal Prime Rate, which banks charge their best customers and is the basis for many ag producers’ annual operating loans, also went up by a point in the past year, to 5.25 percent. The 10-year U.S. Treasury Bond, on which many longer-term loans for property and assets are based, in early December yielded 2.99 percent compared to a one-year range from 2.31 to 3.25 percent.

Interest rate increases have been moderate while economic growth has continued, DiPofi said. 

“A bigger issue is the shortage of labor,” he said. “That has a much more dampening effect in the future for many of our producers than interest rates.”

Sid Freeman, who farms north of Caldwell, Idaho, said higher interest rates will impact producers differently depending on the amounts borrowed. Phil Davis, a cattle rancher in Cascade, Idaho, said producers will feel the effects.

Paying 1 percentage point more in annual interest could have the same impact as losing a like amount of cattle, said Davis, who is also concerned about rising debt-to-equity ratios throughout agriculture.

“If you borrow the money you operate on, it would be like having a 1 percent death loss; there’s that much less revenue for the year,” he said.

More will be known about interest rates and their impacts as crop season approaches and many annual operating lines are renewed, said Charles McElligott, managing director with Rabo AgriFinance in Richland, Wash. An underlying rate index and an assessment of the borrower’s underlying risk are among factors in rates lenders charge.

“The producers that really do have a war on costs are going to find places to cut,” he said. “If they don’t need to borrow as much, without impacting the production capacity of their operations, they will make those adjustments.”

The lower margins producers saw in the past three to four years, on lower commodity prices, stressed their annual working capital to a point that borrowing needs rose overall, said Scott Horsley, Zions Bank regional director and senior vice president of commercial banking based in south-central Idaho. The bank is an active agricultural lender.

On annual operating lines, the amount borrowed typically reaches its high as the producer’s spending peaks before harvest. With tighter margins, “that peak borrowing need has shown some increase,” he said. 

Payments for some contracted crops come throughout the year, Horsley said. In that case, “there is a peak period, but that payment stream may be spread out through the year.”

Perry, of Northwest FCS, expects steady demand for operating loans again in 2019. Demand has been fairly consistent for short-, intermediate- and long-term loans in the past few years, he said.

The value of loan-backing collateral has fluctuated given some lower commodity prices and higher land values. But lenders focus on cash flow primarily, DiPofi and McElligott said.

“On some assets for specialized industries, such as dairy, there could be some strains,” DiPofi said. “But we don’t really consider ourselves an asset-based lender. Rather, we look at profits and cash flow.”

McElligott said Rabo AgriFinance focuses on long-term trends in cash flow. “Producers that are focused on costs, and driving out excess costs, are more likely to get through these difficult times.”

He expects 2019 lending levels to be similar to this year’s. 

“If we could get the trade issue with China resolved, that would bring some optimism,” McElligott said. Regarding commodity prices and borrowers’ operational health, “we are looking at, and the producers are looking at, can they sustain levels of working capital to make it through potentially another depressed year in prices?”

Agricultural lenders aren’t likely to go away regardless of current challenges.

“We are here to support agricultural and rural communities through consistent and reliable credit and financial services, today and tomorrow,” said Perry of Northwest FCS.