Farm Credits long-term funds face rationing

Sep 11, 2009
by DTN
Farm Credit’s long-term funds face rationing

When terrorist attacks engulfed Manhattan’s financial district on Sept. 11, 2001, the New York Federal Reserve staff slept on their desks and survived on cheese sandwiches for several days just a block from the ash and burning rubble of the World Trade Center. Emergency generators kept computers running.

Key staffers had to oversee inter-bank credit transfers and clear checks each night.

“We only vacated because another skyscraper was threatening to fall,” recalls Jamie Stewart, then the second-in-command at the New York Federal Reserve.

The experience taught the veteran banker “to take contingency planning seri ously.”

Barely seven years later when the Sept. 15, 2008, bankruptcy of Lehman Brothers thrust America into economic freefall, Stewart mustered that same devotion to duty again, this time as chief executive of the Farm Credit System’s Funding Corporation. His efforts have kept credit flowing to agriculture.

But the financial crisis has crimped rural lenders’ long-term borrowing capacity, and left farmers without a steady supply of fixed-rate mortgage money. It’s a void not likely to be filled anytime soon, Stewart says.

Ag’s ATM

The Farm Credit System finances $160 billion worth of credit for the nation’s farmers and grain cooperatives, all supplied by New York financial markets.

That represents about $4 out of every $10 of U.S. farm debt and includes most of the nation’s farm real estate mortgages, as well as elevators’ margin calls, fertilizer imports, and much of U.S. agricultural exports.

“We take huge pride that the Farm Credit System went into this banking crisis with lots of capital, lots of liquidity, and a regulator who had a strong reputation,” says Stewart. With retained earnings, loan loss reserves, and its own insurance fund, the system holds a risk capital base of about 20 percent, much larger than the 7 to 12 percent capital averaged by banks.

Still, reputations meant little when fear reigned.

“There were days last September when things seemed to be spinning out of control,” he recalls. Unquestioned giants such as Bear Stearns and Merrill Lynch vanished. One weekend, Lehman failed; another weekend, Freddie Mac and Fannie Mae—the closest things to brother and sister agencies the Farm Credit System has—fell under government conservatorship.

“At the time, they were AAA-rated credits,” he says, the same rating the Farm

Credit System retains today.

Investors didn’t know whom to trust. “It was gen genuine panic.”

Gone were the days when Stewart could sell $1.5 bil- lion worth of 10-year bonds with just a few phone calls to the system’s favorite in- vestment bankers.

Back then, terms could be drawn up in 24 hours and the mon- ey would flow into the Farm Credit System’s pipelines in three days. Throughout last fall, Stewart had to scramble just to sell 2- or 3-year notes.

Stewart still can’t easily persuade investors to buy bonds longer than five years, and that means farmers’ access to long-term fixedrate mortgage funds may be seriously constricted.

“We’re at historically low interest rates, if you can lock them in and control your credit costs,” says Bob Frazee, CEO of MidAtlantic Farm Credit. “The problem is, it’s hard to offer borrowers anything beyond a 5-year term.”

Rationing mortgage money

Just as Sept. 11 altered the nation’s consciousness of terrorism, so fallout from Wall Street’s 2008 financial debacle will alter normal lending practices. It is a message that most farm borrowers and U.S. farmland markets have yet to fully comprehend.

Pre-2008, there was almost no constraint to the money spigot channeling funds from Wall Street to rural America. “Two years ago, our access to funds was unlimited. If every farmer in America had wanted to lock in a 10-year, fixed-rate mortgage, we could have done it,” Stewart says. Not so now.

“Capital is scarce. We need to be more thoughtful about who gets those long-term rates,” says Stewart. “Higher risk credits, or those who haven’t been our long-term customers, will face a higher hurdle” for fixed-rate money in the future.

That could be a serious competitive problem, except no one in private lending can easily access long-term funds either. At least one large insurance company abruptly pulled out of farm credit markets last fall. This left pork producers without funding for livestock buildings and reduced the competition for farm mortgages. The nation’s farm equipment dealers also lost inventory financing when Textron exited the market in February.

Last fall, Rabo AgriFinance CEO John Ryan, who manages a farm real estate and operating loan portfolio of about $5 billion, felt the pinch of higher-cost Wall Street funding, too. “No industry has escaped” the financial market’s instability, Ryan said at the time. Early on, some farm lenders might have mistakenly believed that the mortgage crisis would bypass rural America.

But all lenders have been affected to various degrees, he added.

As access to long-term funds has tightened, Louisville-based Farm Credit Services of Mid-America CEO Donnie Winters admits rural housing business withered.

“We can’t get close to the 30year, 4.85 percent fixed rate offered in consumer markets,” he said. Farm Credit institutions still offer fixedrate farmland mortgages, but they are priced with much higher premiums than variable or short-term rates to discourage takers. The Louisville association offers qualified borrowers 4.4 percent on 1-year adjustable real estate mortgages today, but 6.6 percent on the 20year fixed rates.

Going forward, all farm credit institutions will need to ration who can access long-term money carefully because Stewart does not see a quick economic recovery or instant solutions to the problem.

Stewart’s greatest concern is if the value of the dollar plunges further, global investors may exit U.S. bond markets en masse.

That would mean Farm Credit’s unlimited money spigot could run dry at times, or at least take longer to prime. “The lesson for government-sponsored entities like Farm Credit is to run conservatively so it has ammunition when you need it.” — Marcia Zarley Taylor, DTN