OREANDA-NEWS. Major U.S. agricultural lenders, including the Farm Credit System and commercial banks, will weather the U.S. agriculture economy slowdown, according to a new report from Fitch Ratings.

Following a prolonged period of growth and stability from 2004-2014, the agricultural economy has weakened due to improving crop yields, lower demand caused by the global economic slowdown, and higher costs for countries with weaker currencies driven by the strengthening U.S. dollar.

"As the ag economy weakens the Farm Credit System and ag lending banks may see some asset quality deterioration," said Bain Rumohr, Director, Fitch Ratings. "However, Fitch does not expect the impact to be nearly as harmful as the 1980s agricultural crash due to the relative strength of the Farm Credit System and a less volatile interest rate environment."

The primary agricultural lender in the U.S. is the Farm Credit System, a government-sponsored enterprise (GSE) which had over $235 billion of loans outstanding at Dec. 31, 2015. Created in the early 1900s, the system's provides reliable and consistent financing for ag-related purposes. During the 1980s agricultural crisis, the U.S. government provided support for the system in the form of U.S. Treasury-guaranteed funding. Fitch's rating of the Farm Credit System is tied to the strength of the U.S. Government's 'AAA' Issuer Default Rating and Stable Outlook, which Fitch affirmed on April 12, 2016, as the agency expects the U.S. Government to continue to back the Farm Credit System.

Commercial banks are a secondary credit provider in U.S. agriculture but combined account for nearly half of all farm lending. Agriculture related exposures in the banking system are mainly concentrated in rural banks, many with less than $1 billion in assets. These smaller banks often compete with Farm Credit System associations. Outside the two specialized lenders (John Deere Capital Corporation and Rabobank), the top bank agriculture lenders in the U.S. by dollar volume have minimal agriculture exposure relative to total loans.

The effects of a softer farm economy on banks and Farm Credit System will likely vary but not have any meaningful impact on ratings. Larger U.S. banks have relatively limited exposure to agricultural lending which diminishes the impact. Fitch expects smaller banks with agricultural loan portfolios greater than 5% will increase loan provisioning in the coming quarters, similar to those banks with outsized energy exposure, to manage the agricultural slowdown.

"The Farm Credit System's loan portfolio will likely grow in the near to medium term as farmers seek additional working capital to cover operational shortfalls and commercial banks pull back on ag-related lending due to economic weakness," added Rumohr.