Ag Lenders Discuss Credit Scene at D.C. Forum

More Risk Being Returned to Farmers

Anne Harnish
Lancaster Farming Staff

WASHINGTON — A panel of ag lenders presented financial and credit outlooks at the National Press Club in Washington, D.C. on Nov. 18.

The Farm Foundation’s president, Neil Conklin, opened the meeting by inviting the presenters to talk about “How the Financial/Credit Crisis May Impact the Agriculture and Food Industries.”

The panelists were Joe Brasher of the First State Bank of Sharon (Tennessee); Cornelius “Corny” Gallagher of the Bank of America; Paul Marsh of Prudential Agricultural Investments; Bob Frazee of Mid-Atlantic Farm Credit and Paul Ellinger of University of Illinois, all on hand to discuss credit issues and answer questions from the audience.

The overall message from the lenders was that farm credit is strong and there is not a crisis within the farm credit industry.

Gallagher, Bank of America’s senior vice president and agribusiness executive, described the strength of the bank’s diversified portfolio.

When comparing today’s situation to the farm credit crisis of the 1980s, Gallagher said, “it is clear we are not in a farm credit crisis today.”

However, the panelists agreed the global economic crisis is effecting certain aspects of credit availability and many of those risks are being passed on to farmers.

Marsh said much of the farm credit strength is due to the low rate of delinquency on the part of farmers historically, as well as farm lenders not following the same predatory practices that caused the downfall of the mortgage market.

Ellinger, of the University of Illinois, said that the farm debt-to-asset ratio is on average low, currently at 10 percent, although he cautioned how this should be interpreted.

Brasher, of Tennessee, said “agriculture is in its third year of excellent profits and is situated well to handle the economic crisis.”

Over the past year lenders were able to put up large amounts of cash to cover any problem areas, and several of the panelists said farm lenders and banks will be able to do that again if necessary.

Brasher said that farmers have begun asking him about their local bank’s stability, wondering if they should change financing venues. He said although local and community banks are experiencing some ripple effects due to the overall economic crisis, they have been shown to be generally stable. Brasher said this is also because the smaller local banks did not made subprime loans and they acted very differently than the investment banks that have recently failed.

Effects of Market Volatility
Many farmers were unable to lock into the beneficial high rates earlier in the season because they were unsure of crop yields, said Marsh.

Gallagher pointed out that a stable environment is much easier to deal with than a volatile one, for both farmers and lenders.

According to Ellinger, many Illinois farmers have experienced recent volatility in incomes, and he believes the overall credit crisis will mostly effect farmers’ profit margins.

Brasher said farmers are having a hard time deciding what to plant in the upcoming season because of market volatility. He said the economic crisis causes fears and emotions, and it is difficult to make decisions living with this unpredictability.

Gallagher said that economic predictions for the lenders were difficult this past year and it created problems because lenders didn’t know how to prepare.

At one time “the range for corn was from $2 to $10 a bushel, a very wide range that left a lot of uncertainty, he said. Gallagher believes that “improvements in forecasting ability will be very important for lending institutions in the coming months.”

According to Brasher, market volatility affects ag businesses even more than farmers and called these businesses the “first line of defense” in the ag industry.

For instance, he said grain elevators had made some contracts with farmers but then became caught by the market variations in grain prices. Now, elevators are no longer making forward contracts, leaving farmers with more risk and uncertainty.

Global credit problems are effecting agriculture, said Gallagher, referencing a Bloomberg report on trade letters of credit and shipping of grain. The Oct. 15 report states that “traders are finding it harder to get letters of credit that guarantee payments for goods” and that shipping and trading are slowing down because nobody wants to take the risk that they won’t get paid.

Harder to Qualify for Farm Credit
Lenders will be looking more closely at farmers in terms of cash flow and crop insurance, said panel members.

Ellinger said that he is seeing evidence of lending institutions scaling back new loans to farmers, and believes that longer, fixed-rate loans are no longer available.

At the end of the meeting, one questioner acknowledged that, in his experience, credit for farmers is still available, but said it is becoming much harder for farmers to get long-term loans. He sees farmers being offered only short-term, variable rate loans, sometimes at seven or eight percent, he said, while still being asked to put 50 percent down.

In response, a panelist said that in fact banks’ credit rules have not changed but that, “in this economy, it got to be harder to qualify to borrow.” “Long-term fixed rate loans are just not available right now due to the overall economy,” said the panelist.

The Farm Credit Administration’s Nancy Pellett asked the panel if there was servicing available for new, young farmers. She said that this group is critical to agriculture and cannot be left behind during economic downturns, especially because the average age of American farmers today is in the late 50s.

Loaning to new, beginning farmers is not a problem, one lender responded, because “typically young farmers come in with older family members to get loans.” The young farmers must still conform to underwriting standards, he said.

Another panelist said that one interesting recent development in successful new farmers seeking loans are third-generation farm laborers, especially in the western U.S. He said there is a young, minority farm council being put together to assist this group with business training and counsel.

Some heated back-and-forth discussions between panelists and audience members attempted to place blame on oil speculation as a major cause of the volatile market. The panelists agreed that there was a direct relationship between the price of corn and the price of oil, and that on the same day that corn prices peaked in 2008, so did the price of oil.

Ellinger said that his main concerns for agribusiness financing are in the areas of ethanol, grain elevators, input supplies such as fertilizer, and trade letters of credit no longer being accepted.

He would like to see more cooperation among ag lender groups and suggested that now might “be the time to stop competing with each other.”

Ellinger said he is concerned about the financial, commodity and input price risk being pushed to the producer: “Risk that has typically been managed by other groups is now being pushed on the farmer.”