Credit Crisis and the Ag Sector:
Implications to Farmers and Agrimarketers
How is the credit crisis affecting your customers? Even if they don't need credit to buy your products, rest assured there are implications for you. Perhaps the effects are as small as less time to consider the purchase decision for your product as they spend more time dealing with credit issues.
Throughout the turmoil of the recent economic crisis and as banks slowed the flow of credit for residential home loans and other lending, agricultural and farm lending has continued to flow. But there are some signs of distress. Our work with farmers and retailers more than a year ago showed their concerns. Whether it was figuring out how to deal with margin calls that had escalated above the million-dollar threshold and their credit limit or an ag distributor who created a new staff position to help customers develop the financial reports and business plans they need to secure credit, signs were there.
The U.S. Federal Reserve's First Quarter 2009 Agricultural Finance Databook reported that the average size of non-real estate loans made to farmers was $73,870 in the first quarter of 2009, up from $66,990 in the same period in 2008 and $58,330 in 2007. The increase in loan amounts is no surprise given increases in operating and input costs over the same time period. The total number of ag loans has also held steady over the past two years.
Strategic Agribusiness Review (SAR) checked in with leaders at the American Bankers' Association Center for Agricultural and Rural Banking to get an update on the state of ag lending and how the economic crisis will impact ag lenders and farmers in both near and long terms. Keith Leggett, senior economist, and Jeff Greenlee, president of NBC Bank in Altus, Oklahoma, and vice chairman of the Agricultural and Rural Bankers Committee, provided their perspective on the policy and real-world implications for farmers and agribusinesses.
In addition, the House Agriculture Committee held a hearing regarding rural credit conditions earlier this month. Testimony from Farm Service Agency and Farm Credit Administration officials shows an increasing number of farmers turning to federal loan programs as commercial credit is less available.
SAR: We've heard throughout the last year or so that the ag credit system remains strong in the midst of the general economic crisis ... is that still true?
 Keith Leggett, senior econimist
Leggett: Overall, the farm sector is still one of the better performing sectors in the economy and credit is still available to farmers. Over the past couple years, we've seen strong farm incomes and solid balance sheets and an improvement in ag loan repayment rates compared to earlier in the decade.
However, the farm economy is not isolated from the broader downturn. There are three primary concerns that we are monitoring:
- The strong run up in land values over recent years is starting to flatten out. In the fourth quarter of 2008, we began to see some slowing and values backing off in some places. In many cases, producers who bought land recently did so with cash from strong commodity prices, but we need to monitor the situation.
- As ethanol producers scale down or close production, it is lowering overall corn demand and pressuring commodity prices.
- Farmers are feeling the pinch of high input costs. Even though some costs have dropped in the last few months, many farmers purchased fertilizer last fall when prices were high. With higher input costs, the margin of error is narrower than the past two years for growers to turn a profit on crops.
SAR: But not all ag sectors are strong right now. How are challenges in the livestock and dairy industry impacting loans to farmers?
Leggett: We are seeing more concern about lending in the dairy sector. Lenders are working closely with dairy customers right now. If a dairy producer's fundamental business and balance sheet are solid, but he is experiencing short-term cash flow problems as a result of the current market, a lender will likely work with him to get into a FSA or guaranteed loan program.
The biggest question is how any potential policy decisions in the dairy sector such as buyout programs will impact the profitability and markets in other sectors. In the past, we've seen adverse effects on cattlemen of dairy buyouts, so we'll be monitoring actions and related impacts very closely.
SAR: How have ag banks changed the way they do business in light of the volatile commodity markets and input pricing?
 Jeff Greenlee, president NBC Bank
Greenlee: Many banks are not spending as much effort changing policies and standards as much as they are more closely monitoring the business they currently have and identifying potential risk problems.
I think anyone could take the opportunity to look more closely at price protection enhancements such as hedging, options, forward contracts, etc., where available. Other opportunities for risk management might include FSA guarantees and interest rate risk coverage through longer term funding products such as those available through the Federal Home Loan Bank or Farmer Mac.
SAR: What lessons did agriculture learn from previous farm crises?
Leggett: Agricultural lenders have definitely learned lessons from the past. Thirty years ago, ag bankers weren't looking at how a loan would perform in various input cost or commodity price scenarios. Loans were made based on the rising value of land with the assumption that those values would continue to rise. Now, ag loans are based on cash flow and given complex "stress tests" to see how a loan would perform under various input and commodity price scenarios.
In fact, I've told people that we likely wouldn't have experienced the burst in the residential credit bubble if ag lenders had been responsible for reviewing and making many of those loans in the first place.
SAR: What should agri-marketers keep in mind as they work with farmers making or considering major purchases?
Greenlee: Many ag producers are doing the same thing as consumers in that they are holding off purchases and tightening their belt, even though their own revenue source might not be cut or in jeopardy. At the same time, some might be looking at long-term buying opportunities given their current financial and cash strength. If a producer doesn't have cash for a purchase, they are going to need a push, such as financial incentives to entice them. Keep in mind, though, that many producers know now the difference between financing incentives and irresponsible lending (interest only, too lengthy amortization period, unreasonable debt service requirements, etc.) from the failures in the housing market.
We should also be watching future changes in the income tax laws and programs that might alter a producer's purchasing habits and marketing plans. With programs being presented in the trillions of dollars in Washington DC, income tax changes — both positive and negative — are certain to change our buying habits.
SAR: We're seeing a great deal of interest in changing regulatory policies and oversight for broader banking industry given current economic situation. How might that impact farm lending?
Leggett: The biggest concern with bank regulators in the farm sector right now is on farmland values. While we are seeing a slowdown in rising farmland values, and even a decrease in some areas, land values are still high. Regulators are looking at the high farmland values and wondering if we may see a repeat of the "bubble" that we saw burst with residential real estate values. As a result, regulators are more closely evaluating the underwriting of farm real estate loans. Lenders are requiring more documentation, requiring additional collateral, loan-to-value ratios are lower. Farmers looking to purchase real estate will still find credit available, but the paperwork and underwriting process have stepped up.
The tightening of credit policies and documentation requirements at commercial banks is leading to increased demand for loans through the Farm Service Agency, according to the testimony of Doug Caruso, FSA administrator, at the June 11 congressional hearing. FSA, which makes loans to farmers who are unable to qualify for commercial credit, is seeing its highest demand levels in more than 20 years.
Demand for direct operating loans is up by 81 percent, and demand for direct ownership loans is up 132 percent. The number of direct operating loan applications from new customers is also up sharply, with 45 percent of direct operating loan applications approved in fiscal year 2009 going to farmers without existing FSA loans. That number is typically 20 percent.
But the greatest reason for concern is the growing number of unfunded loans. Caruso also testified that the agency has a backlog of 3,000 approved but unfunded operating and ownership loans totaling more than $373 million. The department is unable to fund these loans through fiscal 2009 appropriations. Another 3,000 loan applications are awaiting review.
As agrimarketers, we need to continue to monitor credit markets closely and stay connected to our customers to understand the implications on their operations.
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