Recent flooding in the Midwest may cause losses to farmers that will eventually lead to credit issues at the banks that lend to them.

Nebraska was hit hardest by recent flooding, but snowmelt and heavy rainfall throughout the Midwest caused floods in Iowa, Wisconsin, Illinois, South Dakota and Minnesota too. Officials estimated losses for Nebraska's livestock sector at more than $400 million and said the state's crop industry would take an estimated $440 million hit due to delayed or prevented planting. Those losses do not account for property damage.

Richard Baier, president and CEO of the Nebraska Bankers Association, said the state was hit twice — first by a blizzard in the west followed by flooding in the east.

"It really impacted every segment of our farm and ranch economy across the state," Baier said in an interview.

Planting for the 2019 crop year may be delayed as farmers work to remove sand from their fields that was left as flood waters started to recede, according to Baier.

And he said flooding impacts extend beyond the field, creating knock-on effects for farmers and the banks that lend to them. Leftover crops from last year — stored when prices were low in anticipation of selling later — were also destroyed. Storage bins were ruined and equipment may have been damaged. Livestock were stranded by the flooding, and calves lost will affect the next generation of cattle. Roads and bridges were washed out, creating potential future issues as rural farmers need to get their crops to market during fall harvest season.

"It could certainly put the marginal farmer whose business is stressed into default," said Timothy O'Brien, a bank analyst with Sandler O'Neill.

Banks that lend to agriculture producers may be affected by the flooding and its fallout. Stored grain and livestock are both used as collateral for loans. "To the degree that that's lost, the repayment has to come from elsewhere, so that's going to put stress on the loans," O'Brien said.

Baier likewise said Nebraska banks' credit will be impacted, though he expects it will be a long-term process.

Large banks hold the bulk of the deposit market share in flood-affected Nebraska counties. Many are heavily concentrated agriculture lenders as well. Sioux Falls, S.D.-based Great Western Bancorp Inc. has the seventh-highest deposit market share in the area and had nearly 23% of its lending in agriculture at the end of 2018.

But smaller banks that serve more localized areas may be worse off than their larger counterparts. "Smaller community banks are more of a risk from a concentration standpoint," said Nathan Race, a bank analyst with Piper Jaffray. More than 70% of nonperforming agriculture loans in the Midwest are at banks with less than $10 billion in total assets, according to Piper Jaffray's quarterly agriculture update.

Regulators have encouraged banks to work with borrowers using troubled debt restructuring options, O'Brien said. A news release from bank regulatory agencies said efforts to restructure loans "should not be subject to examiner criticism." But as loans are restructured, the terms and yields change, and that could reduce the net interest margin those loans were providing to banks, O'Brien said.

There are some potential bright spots. There is a possibility that crop loss in parts of the country will result in higher prices, since corn and soybean grain have been in oversupply for so long, according to Race.

"While this year's crop for corn and soybeans may not be as robust as years past, that may actually be a net positive from a pricing standpoint," he said. For some of the larger banks like Great Western, which have agriculture loans spread throughout the country, that potential price increase could combat some of the crop loss in the Midwest.

Disaster relief can also be good for communities and banks in the long term, O'Brien said, "because they can rebuild infrastructure and bring it up to snuff."

But no disaster relief bill had been passed, and Congress went into recess on April 15. For some in the agricultural industry, that could be a problem. When it comes to disaster relief and spring planting, "time is of the essence for a lot of these [farmers] who do have to put crops in the ground," O'Brien said.

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