“Our direct loans with crop farmers are going to perform reasonably well,” says Bill York, CEO of AgriBank in St. Paul, MN. “Prices are up and crop insurance provides a buffer.”

AgriBank is part of the Farm Credit System, one of four funding banks that provides capital to local Farm Credit Association lenders. AgriBank provides funding in the 15 upper Midwest states.

The region produces 85% of the corn and soybeans in the U.S., York says, and the drought gripping the nation is top of mind not just for lenders, but for producers as well. However, York thinks farmers will get through the year in relatively good shape.

“I do not see a reversal in land values because of the drought,” he says. “I would expect that we may see some moderation in the rate of growth – at worst, some leveling off for a year or so. But we need to keep in mind that on the crop side, where there’s a drought, there is substantial insurance. We’re probably looking at reasonable profits even by those who are affected by drought.”

Jason Henderson, executive of the Omaha Branch of the Kansas City Federal Reserve, agrees. “Although crop prices have yet to match the 50% price increases in 1988, further reductions in harvest expectations could send crop prices higher,” Henderson says. “Despite significant yield losses, USDA’s price and yield projections suggest that U.S. corn revenues could rise 12% above June estimates and approach last year’s record highs.”

Given that scenario, don’t look for corn prices to fall off anytime soon. “We don’t project where yields are going to be,” York says, “but we expect yields are going to be down substantially. Current estimates are coming out in the 120 bu. range for corn. We think that’s not unreasonable and perhaps it’s a little worse than that.”

Livestock producers hit hardest

“Where we see our stress is the quarter of our portfolio that is livestock,” York says. “We expect to be financing more working capital and operating loans than we have in the past just because short-term earnings are going to be stressed.”

Ranchland values, however, are expected to remain strong. According to the Kansas City Fed, ranchland values in its district climbed higher this year, with annual value gains averaging 16% compared with last year.

However, while York expects ranchers will be stretched and stressed by what 2012 has thrown at them, he says long term, the cow-calf segment will come through this year. “Our history has been that cow-calf producers have traditionally done very well in managing through stressful situations,” he says.

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