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Are You Aware of the Risk in Your Agriculture Loan Portfolio?

By: Nick Keener and Christopher Meriwether

The 2012 summer growing season has brought with it the worst U.S. drought in more than 20 years. Lack of rain and extreme heat have affected most of the continental United States, including a majority of the states in which crops are produced. To put the issue in context, the U.S. Department of Agriculture announced these statistics in July:

The above statistics lead to an expectation that 2012 crop supplies will be less, and lower supply leads to several issues for our nation’s farmers.

Potentially helping to mitigate some of the risk associated with the 2012 season is the fact that many crop farmers are coming off a record-high year in 2011 and could potentially be better prepared to weather the oncoming storm. In addition, many farmers have revenue crop insurance protecting approximately 65 percent to 85 percent of their anticipated revenue streams, which could allow them to experience some benefit from the increased prices. The government also has announced steps to provide aid to livestock farmers through a USDA meat purchase of up to $170 million. The USDA is approved to buy as much as $100 million of pork, $50 million of chicken and $10 million each of lamb and catfish to aid farmers.

Banks should take a proactive approach in determining their exposure through lending to agricultural and agriculture-related industries. Here are some items to consider when determining exposure:

If management determines the bank has exposure through agricultural lending, it will be important to assess the risks associated with the 2012 drought on the bank. Some key risks to consider could include:

Ultimately, the bank should thoroughly document its agricultural risk position in light of the 2012 drought. The effect this has on allowance for loan losses also should be documented, including why (or why not) increased provisions to the allowance might be justified, i.e., through an environmental factor adjustment and or specific allocations for specific credits.

Nick Keener is supervisor, financial services, manufacturing & distribution, for BKD in Evansvile, Ind. Christopher Meriwether is a manager, financial services, for BKD in Louisville, Ky.

Copyright (c) November 2012 by BankNews Media