Ag lending landscape changing

Jan 15, 2010

Commercial farmers are going to have credit options going into 2010, but traditional bankers may not be a lending option, and small farmers could struggle more than larger farmers to get credit, a major leader in the Farm Credit system says.

Donnie Winters, president and CEO of Farm Credit Services of Mid- America, laid out the challenges of the current lending environment to farmers attending the DTN/The Progressive Farmer Ag Summit recently in Chicago, IL. Farm Credit Services of Mid-America, with $15.4 billion in assets, serves 88,000 customers in Indiana, Kentucky, Ohio and Tennessee.

For farmers needing constant loan service for their business, banks could become a dwindling resource, Winters said. There will be some banks to serve farmers, he said, but in the broadbrush picture, banks are struggling.

“The banks have an issue, not that they don’t want to serve you, just that some are having enough financial trouble they don’t want to take on any more significant business in 2010,” he said.

Analysts are forecasting the overall banking industry will report a fourth-quarter loss in 2009, and some analysts are predicting the banking industry will show a loss for all of 2010. Banks have been hit hard in commercial real estate, credit markets and car loans.

Few national banks are likely to be major lenders to agriculture, Winters said. They have minimal agricultural portfolios and are already dealing with some significant financial challenges of their own.

“In terms of a source of lending to you farmers, they are not very credible,” Winters said.

Regional banks have been more significant agricultural lenders in the past, but also have been tied up in home loans, credit cards and auto loans. Due to that, regional banks are not going to be aggressive in lending to farmers or taking on new customers. Winters pointed out that in Kentucky, a couple of regional banks loaned heavily to the thoroughbred industry, but have pulled out and left a major gap in lending to horse owners.

“We’re filling some of that need, but it’s not a market we have focused on in the past,” Winters said. “This is an example where the regional banks were the primary lenders and one now no longer exists, and another has backed away from that market.”

Community banks want to continue serving farmers, but some of those have been caught with single, large exposures to housing developments, strip malls or motels that have left them unable to continue lending and now struggling to survive, Winters said.

Insurance companies are all over the board right now when it comes to lending, Winters said. “They have been out; some have come back in,” he said. “They are very inconsistent.”

Captive finance companies, which often finance equipment for specific companies, saw their lending dry up, but they have recovered. “They are back and will be there,” Winters said. “These markets have opened back up.”

Foreign banks such as Rabobank also are still a viable source of credit in regions of the country mostly served by those bankers.

Those foreign lenders are mostly focusing on larger commercial operations. “They are not interested in the small, traditional farmer; they are interested in you,” Winters said.

Of course, farmers also have the option of the Farm Credit System, Winters emphasized. “Farmers are the only businessmen that have their own source of funds that can go directly to the money markets.”

A few Farm Credit lenders across the country are struggling, particularly those that had concentrated lending in some of the hardest-hit sectors of agriculture, Winters said.

“So the sources of credit are going to be fewer than you have had in the past, but there is going to be plenty there for you in the commercial group of farmers,” he said.

It is notable, Winters said, that larger commercial producers are more likely to find access to loans than “traditional” smaller farmers, primarily because lenders are not interested in the smaller operations. Banks that loan to smaller, parttime farmers also have “basically left that market,” he said.

“It’s kind of a strange twist of things when the larger farmers have more loan options than the smaller farmers, but that’s where we are today,” he said. “There are places in our area where if you wanted to borrow to buy 100 acres, Farm Credit is the only entity around that would do that.”

Still, Winters said lenders overall are going to have more demands for customers. Credit is going to be more expensive, with interest rates trending up over the next three or four years. Farmers are going to have to show more working capital and more equity in their operations as well. Instead of “debt-to-asset” ratio, which is a traditional standard for lending, bankers are focusing on debt-toincome and debt-per-unit.

Debt-per-unit may translate into how much debt a farmer has per acre of crop or per head of cattle or sows. On some dairy operations, the debt per cow right now is reaching about $5,000 a head, Winters noted.

“Debt service per acre of $150 to $200 is going to be pushing the limit,” he said, adding that a land-owning farmer can become noncompetitive with cash renters.

Bankers financing ethanol plants are looking at the debt levels per gallon of ethanol. In some cases, the debt could be $1.50 per gallon, depending on how much equity was in the original construction and working capital loans.

“On these specialized facilities, the credit can deteriorate pretty fast,” he said.

Repeating some statements also made earlier in the summit, Winters said lenders are looking harder at counterparty risk, or the financial situation of companies farmers rely on for inputs and sales. — Chris Clayton, DTN