South Dakota Ag Connection - Rate of Farm Loan Rejections Almost Doubles Among Banks

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Rate of Farm Loan Rejections Almost Doubles Among Banks
South Dakota Ag Connection - 06/24/2018

The Creighton University Rural Mainstreet Index climbed above growth neutral in June for a fifth straight month, according to the monthly survey of bank CEOs in rural areas of a 10-state region dependent on agriculture and/or energy. This is the first time since July 2015 the survey has recorded five straight months of overall indices above growth neutral.

Overall: The overall index slid slightly 56.1 from 56.3 in May. The index ranges between 0 and 100 with 50.0 representing growth neutral.

"Surveys over the past several months indicate the Rural Mainstreet economy is trending upward with improving, and positive economic growth. However, the negative impacts of recent trade skirmishes has yet to show up in our survey results. While agriculture commodity prices have improved recently, prices remain below breakeven for a large share of grain farmers," said Ernie Goss, Jack A. MacAllister Chair in Regional Economics at Creighton University's Heider College of Business.

Farming and ranching: The farmland and ranchland-price index for June rose to a weak 42.7 from May's 42.2. This is the 55th straight month the index has fallen below growth neutral 50.0.

Bankers were asked to project the average change in farmland prices in their area over the next 12 months. On average, bankers expect farmland prices to sink by another 2.1 percent over the next year. This is an improvement from last year at this time when a 3.1 percent decline was expected.

The June farm equipment-sales index plummeted to an anemic 36.3 from May's 43.8. This marks the 58th consecutive month the reading has moved below growth neutral 50.0.

Banking: Borrowing by farmers expanded for June as the loan-volume index rose to 76.3 from 74.3 in May. The checking-deposit index slumped to 41.7 from May's 43.9, while the index for certificates of deposit and other savings instruments climbed to a still fragile 47.6, up from 40.9 in May.

Bankers reported their bank's reaction to the continuing weak farm income. Almost two-thirds, or 64.3 percent, indicated their bank had increased collateral requirements on farm loans. Approximately, 40.5 percent indicated that their bank rejected a higher percentage of farm loan applications. This is up significantly from 12 months ago when only 23.9 percent indicated an increase in farm loan rejection rates.

Hiring: The employment gauge improved to a solid 58.0 from May's 56.0. The Rural Mainstreet economy is now experiencing positive year-over-year job growth with added jobs at a 0.9 percent pace over the past 12 months compared to a slightly higher 1.0 percent for urban areas of the region. Both job growth readings are below U.S. job growth over the same period of time.

Confidence: The confidence index, which reflects expectations for the economy six months out, fell to 48.8 from May's 50.0, indicating declining economic optimism among bankers. "Just as last month, an unresolved North America Free Trade Agreement (NAFTA) and rising trade tensions with China continue to be a concern," said Goss.

Dan Coup, CEO of the First National Bank in Hope, Kansas, similar to other Rural Mainstreet bankers said, "Price prospects for grain are a big concern with the trade war talks with China and other countries."

Home and retail sales: The home-sales index moved higher for the Rural Mainstreet economy in remained at a healthy reading with the June index declining slightly to 60.7 from 62.1 in May.

Jim Stanosheck, CEO of State Bank of Odell, Nebraska, echoed many Rural mainstreet communities when he said his community has a low inventory of homes for sale or rent. This supply constraint has boosted prices and reduced sales.

Retail sales dropped for the month, but at a slower rate than in May, with a June reading of 47.6 compared to May's index of 46.9.

Each month, community bank presidents and CEOs in nonurban agriculturally and energy-dependent portions of a 10-state area are surveyed regarding current economic conditions in their communities and their projected economic outlooks six months down the road. Bankers from Colorado, Illinois, Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, South Dakota and Wyoming are included.

This survey represents an early snapshot of the economy of rural agriculturally and energy-dependent portions of the nation. The Rural Mainstreet Index (RMI) is a unique index covering 10 regional states, focusing on approximately 200 rural communities with an average population of 1,300. It gives the most current real-time analysis of the rural economy. Goss and Bill McQuillan, former chairman of the Independent Community Banks of America, created the monthly economic survey in 2005.

The June RMI for South Dakota remained above growth neutral, but was down at 56.2 from May's 56.5. The state's farmland-price index increased to 42.7 from May's 42.2. South Dakota's new-hiring index climbed to 56.2 from 54.9 in May. South Dakota's Rural Mainstreet job growth over the last 12 months was 0.6 percent.

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