(Dow Jones) -- Banks are tightening credit for U.S. farmers amid a rise in delinquencies, forcing some growers to turn to alternative sources of loans.
When U.S. agriculture was booming this decade, banks doled out ample credit to strong performers and weaker growers alike, said Michael Swanson, an agricultural economist at Wells Fargo & Co. But with the farm slump moving into its third year, banks have become pickier, requiring some growers to cough up more collateral and denying financing outright to some customers who need it to pay for seeds, crop chemicals and rent. Farmers this year have been grappling with low commodity prices, mounting debt and weaker incomes.
Claude Sem, chief executive of Farm Credit Services of North Dakota, said he asked some farmers to put up more land or machinery to back loans this spring.
Collateral requirements could increase for more farmers if crop prices remain low, he said, noting that the cash price for wheat in northern North Dakota recently was about $4.50 a bushel, roughly a dollar below what it costs many farmers to raise the crop.
"Below break-even, everything tightens up," Mr. Sem said, adding that falling land values also have spurred lenders to boost collateral requirements, with cropland prices down as much as 20% in some parts of North Dakota.
With traditional bank loans harder to come by, farmers are turning to sources like CHS Inc., a large farmer-owned cooperative in the U.S., which operates grain elevators and retail stores across the Midwest. CHS said its loans to farmers increased 48% in both number and volume in the 12 months to March and have more than doubled since 2014.
It "suggests there are many farmers struggling to obtain financing," said Randy Nelson, president of the co-op's financing subsidiary, CHS Capital.
CHS said its interest rates on farm loans for crop-production expenses generally range from 3.75% to 6%. Commercial banks in the Farm Belt recently have charged about 4.9%, according to the Chicago Federal Reserve Bank of Chicago and bankers.
A recent rally in some U.S. agricultural markets has brightened the picture considerably for growers of crops like soybeans, but many farmers still are facing losses this year thanks to a large buildup in global grain stockpiles that has pressured prices for other U.S. commodities like corn and wheat.
The Chicago Fed earlier this year said the volume of the district's farm-loan portfolio with major or severe repayment difficulties hit 5% in late 2015, which compares with 2.9% a year earlier and is the highest in more than a decade. Illinois banker Eric McRae said repayment problems are deemed serious when growers carry debt from year to year or are 90 days delinquent on loan payments.
Farmers typically take out loans in the first three months of the year before spring planting begins. But this year, growers, including some who had been turned away by their primary lenders, had been searching for financing as late as April, when planters already were rolling in fields across the Farm Belt.
"There's hardly a day that goes by that I don't get approached by someone turned down by another bank," said Grant Lindell, vice president of First United Bank in Michigan, N.D. As late as May, Mr. Lindell said he still was working with several longtime customers to help them make ends meet by selling equipment or taking out a mortgage on their land.
Farmers also are seeking more help from the government. Demand for loans from the Farm Service Agency, an arm of the U.S. Department of Agriculture that administers financial support to growers, is projected to increase 23% in 2016, according to the USDA. That rise in part reflects banks' requests for government guarantees on farm loans and other types of loans like microloans to beginning farmers.
Loan demand has been so strong that the Farm Service Agency already has spent 75% of its allotted funds for the fiscal year, which ends Sept. 30, triggering an obligation to alert Congress to the quicker-than-normal lending pace.
The USDA has said net farm income will slide this year to $54.8 billion, down 56% from its peak in 2013 and the lowest level since 2002. Debt-to-asset ratios among farmers are expected to rise for the fourth year in a row.
Bankers said they generally don't expect anything like the financial strain of the 1980s, when tumbling land values and rising indebtedness pushed many growers and agricultural lenders out of business. Lending activity in the U.S. is still strong, and delinquency rates on farm loans remain relatively low, though they have risen in some parts of the Farm Belt.
But lenders are closely watching their portfolios for signs of stress. Data from the nation's Federal Reserve Banks in mid-May showed growers are appealing to lenders for more loans to cover farm operations even as the rate at which existing debt is being paid off falls.
Some borrowers this spring faced tough decisions over whether to sell assets like farmland or equipment, appeal to landlords to reduce rents or stop farming altogether, said Mark Jensen, chief risk officer at Farm Credit Services of America. About 90% to 95% of the bank's farm loans are classified as "acceptable," but its list of loans to watch is building, he said.
Nathan Kauffman, Omaha branch executive at the Kansas City Fed, said lenders in his district are working to restructure debt for borrowers but can't do so indefinitely. Mr. Kauffman said, "2016 is going to be a critical year."