Not since the 1980s have so many Minnesota farmers been behind on loans. Among the culprits: tight credit and new rules for lenders.
REDWOOD FALLS, MINN. - The number of Minnesota farmers defaulting on agricultural loans has swelled dramatically since 2008, reaching levels not seen since the 1980s farm crisis permanently altered the state's rural economy.
Lenders have sent farmers more than 3,670 default notices in the past 12 months, according to the University of Minnesota's Farmer-Lender Mediation Program. That's up 83 percent in just two years.
The defaults involve all types and sizes of farms, in every part of the state, said Mary Nell Preisler, who directs the U program, which helps farmers find ways to stay in business. It's not only small family farms, she said: "It's everything."
Most of the default notices are coming from small-town banks, where farmers often turn for at least some of their borrowing, Preisler said. While the stream of notices is relatively small considering the state has about 80,000 farms, it represents a serious undertow, farm advocates say.
"It's kind of a silent crisis," said Roger Grugel, a St. Cloud lawyer who helps negotiate with banks as part of the Minnesota Family Farm Law Project. "It's much different than the 1980s when people were protesting and there were tractor-cades."
The tight credit that has roiled the country for nearly two years is taking its toll on farm country. Farmers already are struggling with other problems, such as zigzagging commodity prices.
"I've seen farmers getting cash advances on their credit cards to put in their crops," Grugel said.
Nationally, farm loan delinquencies have been edging up and have hit a 17-year high. For instance, 2.3 percent of all agricultural production loans made by commercial banks were past due, up from 1.3 percent a year ago, according to the Federal Deposit Insurance Corp. (In the depths of the 1980s farm crisis, those delinquencies reached 8 percent.)
In some cases, farmers are finding a way out of financial trouble, in part because prices for farm land have remained strong. A mediator in Preisler's program said that for every default notice that goes out, there's another farmer who probably wrangled a fix.
Still, some banks are cutting the lines of credit that farmers use to cover operating expenses or requiring more collateral to shore up loans. Others are quietly sending farmers elsewhere when their loans mature.
'A state of emergency'
Lenders say they are under pressure from regulators to add cash to their books and shed underperforming loans. Grugel said that when he goes to mediations, bank officials say, "Well, we'd like to rewrite this, but our regulators won't approve us restructuring this loan."
Jim Anderson, a farm financial analyst in Rochester who works with the mediation program, said he doesn't think banks are the bad guys in the current situation. Many rural banks have really worked with farmers in trouble. But in an age of intense bank scrutiny, some loans just smell too sour, he said.
"I've seen a lot of lenders who are heartsick because they have to foreclose on a farmer who they've worked with for 15 years because they can't find a solution," Anderson said.
Marshall MacKay, president of the Independent Community Bankers of Minnesota, which represents most of the state's rural banks, said banks are getting more aggressive with delinquent ag loans. MacKay and some other small-town bankers said they see no farm crisis brewing. The agricultural economy, overall, is pretty good, they said.
"You could make the case that notices are up because regulators are taking a more aggressive stance on lenders taking action against delinquent borrowers," MacKay said. "The real question is: Is that an indicator of more challenging times or more aggressive banker management of farm credits?"
It's both, some in the industry say. Soaring input costs in recent years -- fuel, seed, fertilizer, feed -- clobbered farmers. Hog and dairy farmers, who also suffered falling prices for their products, were squeezed particularly hard. A bumper grain crop may eventually drive down feed prices, but it won't solve the problems.
Tom Anderson, a farm business management educator at Riverland Community College in Plainview, Minn., near Rochester, calls the situation in dairyland "severe." In and around Winona County, a big dairy area, a dozen dairy herds (herds run about 100 to 250 cows) were sold off and dairy operation shut down in the past two months alone, he said. That will be a $10 million economic hit to the region, he estimates.
"How do you get your arms around something so big?" he said. "It is a state of emergency in a lot of ways."
From boom to bust
Hog producers such as Joe Malecek have been caught in the vise grip too.
"Everyone in the hog industry took a big bath," said Malecek, who has been raising hogs for half a century, the last 20 years on his farm with a twisting creek and woods filled with oak trees above the Minnesota River. He grew Mor-Pork Inc. into a multimillion-dollar operation.
The local bank worked with him in recent years when operating costs rocketed, pork prices tanked and Mor-Pork was losing money by the truckload. His $1.4 million loan was extended several times.
Then it was called in.
The move forced Malecek, 73, to sell all of his 21,000 pigs last year, essentially shutting down the only livelihood he's ever known. It didn't help that he had been doing business with the Redwood Falls bank for decades, and used to be on the board.
"They're my friends, and they kept telling me that 'we've got bank examiners that aren't pleased with your loan,'" Malecek said.
Driving his van past his cornfields up to a big, gray house with a turret, surrounded by pumpkins, Malecek is quick to point out that he's not in the poorhouse. When times were better, they moved the grand old farmhouse to this spot overlooking the Minnesota River valley. Then they tricked it out with an elevator, pool and a home theater with overstuffed chairs -- finishing it all just before the hog markets soured in 2007, he said.
Malecek said he lost $3 million in 2008 and 2009 combined -- though he never technically defaulted on his $1.4 million loan with Minnwest Bank, also in Redwood Falls, because the bank extended it several times before telling him he had to pay up. That was hard to hear from a bank where he once had been a director for eight years.
Even after selling his hogs, he still owed $500,000. Malecek said he hired a bankruptcy attorney and told the bank they'd have to take him to court.
For help, rural banks are increasingly turning to the Farm Service Agency (FSA), an arm of the U.S. Department of Agriculture. FSA guarantees loans for up to 90 percent of the value. FSA loans in Minnesota, both direct loans and ones from banks with FSA guarantees, have jumped to 1,839 so far this fiscal year, up from 1,359 in 2008. That's the highest level since the mid-1980s, barring a few years when the state suffered natural disasters, said Stuart Shelstad, head of farm loans in the state FSA office.
In June, Minnwest gave Malecek $575,000 in loans backed by the FSA, with the understanding that he would lessen the risk by focusing Mor-Pork on farrowing, not trying to fatten pigs for market too. Malecek grumbles about the 6.5 percent interest rate, but he's got 1,500 sows now.
Malecek acknowledges the new loan is "kind of a unique situation."
"I'm hoping to get this thing working and cash flowing so they have a different view of it before I croak."
Jennifer Bjorhus • 612-673-4683