Credit problems for ag likely to be limited

Mar 13, 2009
by DTN
Credit problems for ag likely to be limited

While strong 2008 incomes and years of conservative borrowing have kept U.S. farmers in a relatively good credit situation heading into planting season, the long-term outlook is less positive, analysts said. In contrast with the disappearance of available credit in much of the country, banks in rural farming communities are still lending, analysts said. However, economists also report increasing anecdotal reports of tightening credit.

While the rural banks and many rural areas haven’t been embroiled in the subprime-lending mess, they aren’t completely immune.

“The banks have been insulated to a great extent, but they have not been isolated,” said Ernie Goss, an economist with Creighton University.

A January survey of 11 states, from Illinois to Colorado, found that 44 percent of bank chief executives said they had significantly tightened credit, according to Goss, and conditions have probably declined since then. The banks in the survey were in communities with an average size of 1,300, said Goss, a co-creator of the survey.

John Blanchfield, senior vice president of the American Bankers Association, said he has been telling producers to expect their bankers to ask them more questions.

Bankers may, for instance, go out to the farm and re-inventory collateral. Blanchfield called it “backto-basics banking.”

“There is going to be increased scrutiny of applications and there will probably be increased demand on the part of lenders to better understand how the producer intends to market their crop,” Blanchfield said. “They may ask questions about how solid is the buyer of the product they’re producing.”

Those questions will be especially common among corn growers, who have seen the fortunes of one of their best customers—the ethanol industry—reverse drastically during the past year. VeraSun Energy Corp., following its bankruptcy filing last year, cancelled some of its cornpurchasing contracts.

With the exception of the reeling dairy industry, agriculture is going to perform “ok” in 2009, Blanchfield said, and funding shouldn’t be an issue, with interest rates “stable to declining.”

“Typically, farmers for spring planting borrow 12- to 18-month term money,” Blanchfield said. “Really, that money right now is about as cheap as you can get.” Credit problems should be limited to farmers with troubled balance sheets, said Gary Schnitkey, agricultural economist with the University of Illinois. But for most farmers, balance sheets look good, and they are better positioned to handle the economic downturn than other sectors of the economy, analysts say. Prices for agricultural commodities soared in 2008 along with crude oil as the dollar plunged. And although prices had fallen by the end of the year, historically, they were still high. “We’re still coming off a pretty good income year, at least for the crop sector,” said Bruce Johnson, agricultural economist for the University of Nebraska.

“And that income year has led to paying down debt and getting better positioned and so forth coming into this year.” But that may not be the case a year from now, Johnson and others warn. If the economy is slow to rebound, as many economists expect, farmers could be in a difficult position because the profit potential for 2009 doesn’t resemble that of 2008. “For the most part, no significant signs of credit issues are being seen, and this spring’s crop is likely to be safe,” said Risk Management Commodities senior analyst Mike Zuzolo, citing anecdotal reports.

“But after that, it could be a different story.” In addition to lower commodity prices, input costs, particularly for fertilizer, are still high, according to many analysts. And farmers’ assets have softened.

Although farm land values have declined only modestly, not close to the pace of property values elsewhere, the days of intense bidding wars over “who can pay the highest cash rent and wrestle [land] away from some other farmer” are over for now, Johnson said. USDA forecasts farm assets will rise by 1.6 percent in 2009, the smallest increase since 1991. Community banks have entered the financial crisis with more resiliency because of conservative lending practices, and farmers have a supportive foundation of historically low debtto-equity ratios, analysts said. That should help farmers next year, even if profits are weaker this year, Blanchfield said. “Obviously, equity doesn’t repay loans, but it gives bankers options on how to structure debt,” Blanchfield said. USDA Chief Economist Joseph Glauber said at last week’s annual Agricultural Outlook forum that going into 2009, farm debt was equal to 9.1 percent of total assets, compared to more than 20 percent in the mid-1980s and 15.2 percent in 1998. “Anecdotally, there are some tightening [credit] conditions, but there are funds out there,” Glauber added. — DTN