While banks that rely on commercial real estate loans have suffered in the last few years, farm banks are currently enjoying a period of calm, some even call it prosperity, due to appreciating land values, favorable commodity prices and strong farm income.

Relative to commercial real estate, the agricultural industry is on something of a tear with six of the past eight years among the top 10 income-producing years, inflation-adjusted, since 1980. Median agricultural loan delinquencies and charge-offs remain near their lowest levels since the early 1970s, according to the Federal Deposit Insurance Corp.’s “Prudent Management of Agricultural Credit through Farming and Economic Cycles.”

First FarmBank in Greeley, where 65 percent of its business is agriculture, is in the upper percentile of its peer group with no past-due loans. “We compare favorably to other eastern Colorado ag banks 20 to 30 years older,´ said Dan Allen, president and CEO of the 3-year-old bank.

The farm crisis of the 1980s, where the farm economy went though a boom-and-bust cycle, is part of the reason for the health of farm banks today, according to Allen. “It changed the way farm banks work, making us more risk-sensitive,” he said. “It left us in a better position than banks that focused on commercial real estate.”

Mark Driscoll, market president of First National Bank, called the climate at farm banks “a season where everything is working. Our loan portfolio is diverse, certainly our ag loans have outperformed those in consumer credit, commercial real estate, and commercial/industrial. It’s good to have ones that are working well when others are not.” While First National is a relatively small farm lender in Colorado, parent company First National Bank of Omaha is the fourth largest agricultural lender in the United States.

New West Bank in Greeley, with 30 percent of its loans in agriculture, is another Northern Colorado bank that’s doing well. With zero past due loans in agriculture, it’s an area New West would like to expand.

“We enjoy and understand agricultural lending and would welcome new agricultural operators,´ said Lonnie Ochsner, president of New West’s Greeley branch. “Really, agriculture in this area for the last four to five years has been strong. Borrowers are experiencing nice profitability, with the exception of dairy farmers.”

USDA reports forecasted net farm income at $81.6 billion for 2010, up 31 percent from 2009 and 26 percent higher than the 10-year average of $64.8 billion between 2000 and 2009.

Optimism balanced by caution, understanding

Despite the favorable climate, farm bankers aren’t really in a mood to jump up and click their heels. One reason for the optimism in the agriculture industry is appreciating land prices, yet lessons of the 1980s farm crisis, where farmers were hit by the worst economic conditions since the Great Depression, remain fresh. Flush with cash, farmers bought land when prices were soaring, and fell into debt when commodity and land prices dropped.

“Focus agriculture loan underwriting on cash flow instead of collateral values,” urges a recent financial institution guidance letter from the FDIC.

Allen echoes the FDIC’s cautions of prudence. “You always have to make sure that you underwrite for the bad times,” he said. “All of the economies of the country go in cycles. The biggest temptation is that when times are good to compromise standards a bit and try to grow.”

Still, John Blanchfield, manager of the center for agricultural and rural banking for the American Bankers Association, is eager to address fears that currently rising land prices are part of a speculative farmland price bubble.

“The rising prices have been called a prosperity goose egg,” he said. “I want to tap down the bubble panic. If this was a credit-driven phenomenon you would see total loans increasing. But farmers are retiring debt faster than they have to. We are seeing the effect of a prosperity bubble.”