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Plenty of Money in the Bank

November 27, 2013
By: Ed Clark, Top Producer Business and Issues Editor
piggy bank savings money

Money might be relatively easy to acquire, but expect question

Will lenders tighten their lending standards with lower commodity prices on the horizon? In short, no. However, lenders do have concerns and will be asking farmers more questions than they have in recent years.

Even with corn futures forecast to be $4-something now through 2016, Michael Hein, Liberty Trust and Savings Bank vice president in Durant, Iowa, says he won’t tighten the credit screws. "We won’t over-react to the downturn," he says.

Hein calculates that with December 2014 corn futures at about $4.75 per bushel and a 25¢ positive local basis, all but his highest cost customers will end in the black if they take advantage of market opportunities.

Additionally, farmers have strong balance sheets, rock bottom interest rates and land values that are not expected to decline, says David Lynn, Farm Credit Mid-America senior vice president of financial services.

"Our farm customers have strong working capital positions," he says, and that gives him confidence that most producers can take on more debt and meet obligations.

"Whether farmers can manage the cost side to make $4 corn work is yet to be determined."

Lynn says that whether lending standards tighten will be determined on a case-by-case basis. For most of his customers, he says loan standards and lending limits will not change for 2014. "We take a long view of each farm’s financial situation," he says.

Another reason why bankers are not preparing to tighten lending standards is because they already have, says Nate Franzen, First Dakota National Bank agribusiness division president in Yankton, S.D.

"As land values shot up, we reduced the percentage we would loan," he says, explaining that they used to lend up to 70% of the value for farmland. "No more," he says. As a result, no further underwriting adjustments need to be made.

And last, but certainly not least, banks are looking to make a profit. "Loans are the best-yielding return a bank can make," Franzen says. Banks, like many farmers, are very liquid right now, so lenders are in a strong position to extend credit.

The latest survey of bankers by the Federal Reserve Bank of Kansas City underscores this. Collateral requirements for loans remain steady, and bankers report adequate capital for what they predict will be increasing loan demands as crop prices decline.

In fact, Farm Credit Mid-America is increasing its loan volume to new and existing customers with a program that runs until March 31 and offers fixed operating loans at 2.99% interest for 12 months. As a result, business has picked up, and Lynn is doing what all lenders want to do—making more loans.

Market Mantra. While banks aren’t toughening loan requirements, they are concerned about risk exposure, especially for crop farmers. To hedge that risk, they will take a proactive approach and ask more questions. The goal is to get farmers thinking about possible strategies to deal with the new era of lower crop prices.

Lenders will ask about marketing plans, but for those with positive ratios, it won’t be directly linked to the ability to obtain financing.

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FEATURED IN: Top Producer - December 2013

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