Credit Pinch Hits Farmers in Northwest : Collapse of PCAs Produces Crisis for Farm Credit System

In the bitter sub-zero cold, Gary and Gayla Mentzer struggled to help their pregnant cows deliver and to save the newborn calves that must go to market fat and healthy 10 months from now.

This is the time of year when the Mentzers most need credit for feed, seed and other expenses. But their chief bank had failed, and the farm couple faced the difficult task of finding credit elsewhere.

“It’s a desperate feeling when, bingo, your lender is gone,” Gary Mentzer said.

The Mentzers ultimately restructured their debts and obtained some fresh loans, but hundreds of other farmers and ranchers have been left stranded by the collapse of eight grower-owned, federally-chartered banks that have been vital sources of credit in the Pacific Northwest.

Handles Farm Debt

Called Production Credit Assns., or simply PCAs, 428 of these unique banks have been started since Congress passed the 1933 Farm Credit Act to help loan-starved farmers survive the widespread failure of commercial banks during the Great Depression.

As part of the multibillion-dollar Farm Credit System--an independent, profit-making banking enterprise that handles more than a third of the nation’s farm debt--PCAs until two years ago appeared to be weathering the economic storms that battered U.S. agriculture.

Then four PCAs collapsed in 1983, the first such failures since the late 1930s. Another four failed last year, including the Western Montana PCA in Missoula, where the Mentzers banked. The failures, which left 2,123 farmers and ranchers financially stranded, all occurred in the Pacific Northwest, not the Midwest where the farm problems have been so highly publicized.

With the collapse of eight of 30 PCAs serving Montana, Idaho, Oregon, Washington and Alaska, thousands of farmers like Mentzer scrambled for new sources of credit. And it touched off a crisis affecting the entire Farm Credit System.

As system managers and federal regulators began emergency measures to pump $25 million into the weakened banks in the Northwest district, another three PCAs were forced to liquidate elsewhere, two in Nebraska and one in Kentucky. An additional 53 have merged into stronger units in the system, and economists expect more PCAs to go under before year’s end.

Never before has the system been under such strain. Most experts agree the current crisis is the first real test of the strength of this unique national banking system, which is funded through the sale of bonds and operates without federal subsidies.

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“The whole Farm Credit System is in deep trouble,” said Neil E. Harl, an Iowa State University economist. “And it’s the farmers who suffer because they are cut adrift at a time when it is extremely difficult for them to find a new lender because of the depressed farm economy.”

Despite the pain, regulators feel the problem is manageable. “Sure the whole system feels the strain, but the impact is by no means serious. The system has the resources to deal with the problem,” says Ronald Erickson, spokesman for the Farm Credit Administration, the independent government regulatory agency.

At the heart of the problem is the farm economy. For nearly two decades, farmers experienced higher market prices, higher costs and higher land values. But the inflationary current came to an end in 1980-81, undermining crop prices and land values and threatening farmers who had borrowed heavily.

America’s farmers owe $215 billion--more debt than Mexico and Brazil combined owe the world banks--and economists predict that current economic conditions will make at least 20% of that debt uncollectable.

News accounts of farms being auctioned off and small commercial banks failing have become routine. The PCA percentage failure rate, while relatively small numerically, is more than three times that of commercial farm banks.

As part of the complex Farm Credit System, the PCAs compete with the more traditional banks to provide growers with short-term credit to finance yearly production needs. They also function collectively in times of economic stress, knitted together by mutual-aid agreements designed to insure that farmers will always have credit available.

PCAs are owned and operated by the farmers who borrow money from them. When a grower like Mentzer needs $100,000 to finance his production costs he borrows $110,000 and gets back shares valued at $10,000, making him an owner-borrower.

The Missoula PCA where Mentzer banked had 550 such members. Its policies and lending practices were governed by an elected board of owner-borrowers, and it was financed through the Federal Intermediate Credit Bank of Spokane. This intermediate bank supervises all of the PCAs in the 12th Farm Credit District that covers the Northwest.

Three Types of Banks

Nationally there are three types of supervising banks in each of the Farm Credit System’s 12 districts. These include the Federal Land Banks that make farm real estate loans, the Federal Banks for Cooperatives that lend only to farm cooperatives, and the Federal Intermediate Credit Banks like the one in Spokane that fund the PCAs in their districts and supervise their operations.

The Federal Credit System has total assets of $9.3 billion and earned a $450 million profit last year, according to federal officials. The system’s land banks and its banks for cooperatives have been strong enough to ease the strain on the intermediate credit banks, which are now burdened with $1.3 billion in worth of loans that are at least 90 days past due, known as “non-performing loans.” That amounts to 6.4% of total PCA loan volume.

The Spokane intermediate bank is reporting $300 million in such “non-performing loans” and was suffering an $800,000 monthly cash flow drain when bank officials asked for help in January. Farm Credit System directors authorized an emergency $25 million capital infusion, while they packaged a $300-million bail-out program to be implemented by April.

This is the first time that the system as a whole has had to help keep one of its districts afloat. And two other districts may need similar assistance because the PCAs in their areas are “experiencing heavy loan delinquencies,” warned Peter J. Carney, president of the Federal Farm Banks Funding Corp., the private firm that sells the system’s bonds in the money markets.

Implementing the mutual-aid agreements that are supposed to tie the system together is proving more difficult than anticipated, said Iowa State University economist Harl. “When one district is in trouble . . . there is a reluctance to contribute capital because they (managers of the other districts) can see some of the same problems coming down the road.”

The experiences of Mentzer and the Western Montana PCA offer a glimpse of what is happening to farmers and their lenders.

Started Fromn Scratch

Mentzer, 42, “started from scratch” in 1972, when the future of farming was bright with promise and credit was easy to come by. He bought 900 acres near the tiny town of Drummond, 60 miles southeast of Missoula, developed irrigation systems, corrals and barns and stocked the place with 400 cows, all on borrowed money.

For his production credit, Mentzer went to the closest PCA. For several years, both he and the Western Montana PCA profited and expanded. When the farm economy deteriorated, however, the Mentzers worked harder but fell behind in their payments. The value of their irrigated hay land plunged to $500 an acre from $1,100 and replacement cows that were worth $750 in 1980 now sell for $400. The price of beef has been below production costs during the past three years.

Sitting at the kitchen table in their used mobile home, Mentzer penciled out his assets today at just over $800,000 and his debt load at $402,000, nearly a third of it owed to the Western Montana PCA.

Because so many of its 550 growers were in similar straits, the Western Montana PCA was in trouble. In 15 years it had increased its loan volume to $40 million from $4 million. By 1984, however, only four borrowers in five were able to make their payments, there were $8 million in non-performing loans, and only $2.3 million was set aside in the loan reserve.

The Spokane intermediate bank stepped in and froze the association’s assets, including the $4.5 million worth of members’ investment. The PCA’s board of directors voted to liquidate. The PCA folded in January, last of the eight to do so.

The Mentzers’ investment in the PCA, valued at $14,000, was tied up along with the bank’s other assets, pending liquidation. The process could take three or four years because PCAs do not immediately foreclose on even the most delinquent borrowers, thus delaying any liquidation of the PCA. The farmers’ investments in PCAs are used to cover any losses; whatever is left after liquidation is returned to the farmers.

After his PCA failed, Mentzer lost all confidence in the Farm Credit System. Through Feburary, as his cows were calving, he had to worry about finding a new banker.

From the Top Down

In western Montana, as elsewhere, the search for new credit is difficult. Bankers such as Michael Wangen, president of First Banks of Missoula are being very cautious. “We only want operators who we know can generate income,” Wangen said.

With cattle prices so low, even the best ranchers have struggled just to break even. Borrowers like Mentzer who have fallen behind in their loan payments year-after-year will find it hard to get a loan from banks like Wangen’s.

Another banker who did not want to be named, contended that PCA lending policies had been too liberal for years. “You can’t be that aggressive and not make mistakes. And now there is going to be a shakeout,” he said.

John Waite, chief liquidator at the Western Montana PCA, agreed, “Obviously some decisions were not well made . . . But remember, the Farm Credit System was being pushed from the top down to make more loans in the late 1970s.”

From system headquarters came liberalized lending policies and directives to expand loan programs, Waite said. PCA lending authority was extended in 1980, for example, to include both timber harvesting and fishing. The first two PCAs to fail had lent large sums to fishermen to buy boats.

Once the PCAs began to fail, the fallout affected other PCAs, including the one in Missoula. The Spokane bank invoked the district’s mutual-aid agreements and by the end of 1984 the district banks had absorbed $5 million in PCA losses.

In addition, district directors voted to consolidate administration of the land bank, bank for cooperatives and the intermediate bank in a cost-cutting effort to head off the cash flow crisis caused by $300 million in non-performing loans held by the PCAs.

But the rescue efforts were too little, too late. With eight PCAs down the tube and others reporting trouble, the intermediate bank itself reported 1984 losses of $22 million. The troubles forced district administrators to ask for outside help.

Lower Rate

Economists like Harl who believe that Congress and the administration must take action to prevent a serious financial collapse. They contend infusions of federal funds and loan-guarantee programs are essential if the system is to be saved.

But not everyone is so pessimistic. “What is happening in Spokane shows that the whole Farm Credit System can stand up and be counted . . . The system is financially capable of handling the problems now and expects to do so in the future,” said James Roll, senior vice president of the system’s funding corporation.

Whatever the outcome, Mentzer is somewhat optimistic. After weeks of searching, he has finally patched together a restructuring of his debts and found a small bank in the nearby town of Phillipsburg that is lending him $120,000 to finance this coming year’s production.

In the deal, the $135,000 in delinquent PCA loans will be paid off by the Farmers Home Administration--the U.S. Department of Agriculture’s direct lending agent for farmers in difficulty--and Mentzer will be given seven years to work off that obligation at 10%, far lower than the 16% he had been struggling to pay.

But, while Mentzer’s troubles appear to be over, at least temporarily, half of the other Western Montana PCA members still have not found alternative sources of credit. And liquidators say a hundred of these farmers and ranchers may not be able to work their way out of the crisis.