Remarks for CFTC Public Meeting on April 22, 2008 

Esther George 

Senior Vice President 

Supervision and Risk Management 

Federal Reserve Bank of Kansas City 

Washington, D.C. 

April 22, 2008 

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I’d like to thank Acting Chairman Walter Lukken and the Commodity Futures 

Trading Commission for the invitation to participate in this important forum today. I 

appreciate the opportunity to be here and to hear the discussion. 

The Federal Reserve Bank of Kansas City closely monitors financial developments in 

the agricultural sector given the concentration of agricultural industries in our region, 

which includes the states of Colorado, Kansas, Nebraska, Oklahoma, Wyoming, and parts 

of Missouri and New Mexico. As a regulator, the Kansas City Federal Reserve Bank 

supervises approximately 170 state-chartered commercial banks and nearly 1,000 bank 

holding companies. And, emerging from our monetary policy responsibilities, we also 

monitor broad agricultural and grain market conditions. 

In my remarks today, I will focus on the availability of credit from commercial banks 

to the agricultural sector by providing a general overview of current banking conditions 

and then highlighting the results of our most recent quarterly Survey of Agricultural 

Credit Conditions in the region. 

Among the issues we have been monitoring is grain elevator operations and 

financing. The first signs of financial strain began to emerge in January when bankers 

were telling us that some customers were low on cash as they anticipated higher farm

input prices – primarily fertilizers and chemicals – and pre-purchased crop inputs for 

spring planting. As these grain elevators became financially constrained, some began to 

require farmers to pre-pay to bolster their cash balances. 

Since mid-February, the surge in agricultural commodity prices has further strained 

the cash positions of grain elevators. As some elevators faced growing margin calls with 

record prices, business contacts in our District began to report that grain elevators were 

requesting additional lines of credit. More recently, some grain elevators have limited

(and in some cases eliminated) their offerings of forward, basis and other contracts to 

limit further strains on cash flows. 

With grain elevators requesting larger credit lines and the deleveraging underway in 

some national credit markets, it is natural to wonder about the capacity and willingness of 

commercial banks to extend credit. To answer that question, let me describe the general 

state of the banking industry. 

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Overall, the U.S. banking industry is sound with $1.3 trillion in capital. However, in 

2007, net operating income for all banks fell (Chart 1). The decline in income was more 

prevalent in larger banks and was a result of higher loan loss provision expenses, 

especially in regions with severe contractions in the housing market. Likewise, net 

operating income for banks in the Kansas City region declined in 2007 with margin 

pressures squeezing profits, but remained above the national average (Chart 2). Regional 

and other small banks with large concentrations in construction and land development 

have experienced increases in problem loans, although the current levels remain below 

historic highs. And, on the whole, capital levels remain well above regulatory 

minimums.

Agricultural banks, in general, have fared better than other banks of comparable size. 

For ag banks, the rate of return to assets remains at the historical average, despite average 

rate of return on equity edging down to its 2001 low. Return rates at agricultural banks 

were stronger than other small banks. Net charge-offs remain at historical levels. (Chart 

3). 

Overall, the condition of the banking industry suggests it remains well positioned to 

extend credit in today’s environment. 

Beyond the ability to lend, one might ask to what extent do banks remain willing to 

lend and under what terms? We look to the respondents to our District’s agricultural 

credit survey, which surveys more than 300 bankers in our District each quarter, to give 

us a sense of current credit terms. At the outset, I should note that our survey indicates 

that the Farm Credit System has more direct exposure to grain elevator financing than 

commercial banks. In March, roughly two-thirds of the respondents indicated that local 

elevators were receiving funding from the Farm Credit System (Chart 4). Less than a 

third noted that commercial banks were funding local elevators. 

Based on the price volatility in commodity markets, we asked a series of special 

questions in the March 2008 survey and learned that only a quarter of the respondent 

banks were actively engaged in grain elevator financing. Of these banks, 40 percent of 

them reported that grain elevators had enough cash to cover current margin calls (Chart 

5). And over a third of them reported that local grain elevators had ample cash to cover 

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current and future margin calls. Less than a quarter of them reported that local grain 

elevators were struggling to meet margin calls. 

Those that did report customers with financial strains were generally concentrated in 

the wheat-growing regions of our District (eastern Colorado, western Kansas, panhandle 

of Oklahoma and parts of New Mexico (Map 1). And even there, reports of struggling 

grain elevators tended to be heavily localized. One survey respondent noted that the line 

of credit for a single elevator had risen eight-fold and required participation of the credit 

with three other banks. Contacts with larger commercial banks indicate that bigger grain 

elevators are also tapping larger lines of credit. With larger demands for credit, banks are 

reporting increases in the number of participation agreements, where two or more banks 

participate in deals to extend credit to grain elevators. 

How are banks responding to this increased demand for credit? Across the country, 

commercial banks appear to have funds available for such loans. Federal Reserve 

agricultural credit surveys for the Kansas City District, as well as those in other Federal 

Reserve districts, continue to report that funds available for loans expanded over the past 

year. In fact, the availability of loan funding in the Kansas City District reached its 

highest level in four years in March (Chart 6). And conversely, the number of loans 

refused due to shortages of funds continued to fall (Chart 7). The amount of funds 

available for loans has risen as agricultural banks experience record-high loan repayment 

rates and a continued contraction in loan renewals and extensions by farmers (Chart 8). 

At the same time, farm loan demand has declined in the past six months, freeing up 

additional funds at agricultural banks. 

The interest rate environment has also been favorable for ag credit. Recent declines 

in national interest rates have led to steep cuts in agricultural loan interest rates. In 

March, District banks reported that farm interest rates dropped to their lowest levels since 

2004 (Chart 9). On the other hand, we have seen growing attention on the part of banks to 

underwriting standards. For example, collateral requirements appear to have edged up, 

although they remain well below 2003 levels (Chart 10). As a result, given current market 

conditions, as grain elevators seek additional lines of credit, they might expect increased 

scrutiny by lenders of their business operations, risk management practices, and financial 

statements. 

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In summary, the banking industry remains sound and able to provide credit as grain 

elevators increase their credit lines as a result of margin calls. To date, creditors appear 

to be working effectively with the elevators to ensure that financing needs are met, and 

there is no indication that this should not continue to be the case. That said, while credit 

is available, banks are likely to pay careful attention to the strength of risk management 

of these elevator operations when deciding to increase advances. 

That concludes my remarks. Thank you. 

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Chart 1: 

Earning Performance at Commercial Banks

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2002 2003 2004 2005 2006 2007

Percent of average assets

Source: Reports on Conditions and Income

*All US Commercial Banks – Net Operating Income Before Taxes, as a percentage of average assets.

Banks under $5 billion

Banks over $5 billion

All Banks

Chart 2: 

Earning Performance at Commercial Banks

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2002 2003 2004 2005 2006 2007

Percent of average assets

Source: Reports on Conditions and Income

*Tenth District Banks without Wells Fargo Subsidiaries

Tenth Federal Reserve District Banks

All U.S. Banks

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Chart 3: 

Financial Performance of Agricultural 

and Other Small Banks

7 . 0

8 . 0

9 . 0

10. 0

11. 0

12. 0

13. 0

1997 1998 1 9 9 9 2 0 0 0 200 1 2 0 0 2 2 003 200 4 200 5 2 0 0 6 2 0 0 7

Percent

Source: Agricultural Finance Databook, Federal Reserve Board of Governors

*Small banks have less than $500 million in assets

Other Small Banks

Agricultural Banks

0 . 7

0 . 8

0 . 9

1 . 0

1 . 1

1 . 2

1 . 3

1 . 4

199 7 1 998 1 9 9 9 200 0 2 0 0 1 2 0 0 2 2 0 0 3 2 004 2 0 0 5 2 0 0 6 2 0 0 7

Other Small Banks

Agricultural Banks

Average Rate of Return on Equity

Percent Rate of Return on Assets

Chart 4: 

Where do Local Elevators Receive Funding?

65.0

29.3

5.7

0

10

20

30

40

50

60

70

Farm Credit System Commercial Bank Private Equity or

Parent Company

Percent of Banker Respondents

Source: Federal Reserve Bank of Kansas City

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Chart 5 

What is the Financial Position of 

Grain Elevators?

36.8

39.7

23.5

0 10 20 30 40 50

Ample cash to manage margin calls

plus reserves for future margin

calls

Enough cash to just manage

current margin calls

Struggling to acquire cash needed

to manage margin calls

Percent of Banker Respondents

Source: Federal Reserve Bank of Kansas City

Map 1: 

Regions with Banks Reporting Grain 

Elevators were Struggling to 

Manage Margin Calls

Largest 

Concentration

Source: Federal Reserve Bank of Kansas City

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Chart 6: 

Loan Fund Availability 

(Tenth Federal Reserve District)

70.0

80.0

90.0

100.0

110.0

120.0

130.0

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Index

Source: Federal Reserve Bank of Kansas City

Chart 7: 

Loans Refused Due to a Shortage of Funds 

(Tenth Federal Reserve District)

0.0

1.0

2.0

3.0

4.0

5.0

6.0

2003 2004 2005 2006 2007 2008

Percent of Bank Respondents

Source: Federal Reserve Bank of Kansas City

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Chart 8: 

Loan Demand, Repayment Rates, and 

Renewals and Extensions

(Tenth Federal Reserve District)

50.0

70.0

90.0

110.0

130.0

150.0

170.0

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Index

Source: Federal Reserve Bank of Kansas City

Renewals and

Extensions

Repayment Rates

Loan Demand

Chart 9: 

Agricultural Interest Rates

(Tenth Federal Reserve District)

6.0

6.5

7.0

7.5

8.0

8.5

9.0

9.5

10.0

10.5

11.0

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Percent

Source: Federal Reserve Bank of Kansas City

Real Estate

Operating Loans

10
Chart 10: 

Collateral Requirements for Farm Loans

(Tenth Federal Reserve District)

100

105

110

115

120

125

130

135

2000 2001 2002 2003 2004 2005 2006 2007 2008

Diffusion Index

Source: Federal Reserve Bank of Kansas City

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