Cost and Availability Concerns for Credit

October 19, 2008 07:00 PM
 

Greg Vincent, Top Producer Editor
 
Agriculture producers could have used a longer runway to be able to coast into this apparent economic downturn. But with commodity prices experiencing a significant sell off recently and concerns about credit availability and costs of credit becoming an issue, the landing appears to be more of a tail hook stop on an aircraft carrier than a greaser on a  mile-long runway. 
 
"The runway hasn't been that long,” says Tim Trotter, a farmer and former National Corn Growers Association (NCGA) President turned business consultant. "It's not just production agriculture, it's all the related industries that will face the same problem. We haven't been enjoying prosperity for a decade—we've had a couple good years, but we've also seen cost increases.
 
"The stakes are higher than ever before. The rewards are there, the possibilities are there, but we need a longer runway to get some liquidity in agriculture to where we can stomach something like this.”
 
The financial industry shake up in the current financial markets, coupled with increased agriculture risk is reason for concern because of the cost of credit. "It's just incredible what people have to do to put a crop in. I'm hearing people say the cost of money may double, and credit availability may be as much of a problem as cost of money,” he says.
 
Trotter believes interest rates eventually as high as 10% is not necessarily out of the question. "With production costs for corn hitting as high as $800-$900/acre with cash rents and input costs, that's a lot of money.”
 
To date, money is still flowing into agriculture communities from lenders like the Farm Credit System, which accounts for nearly 1/3 of all production loans. Farm Credit Council President and CEO Ken Auer, says the system is still upholding its mission as outlined by Congress to provide credit and related financial services to farmers. "We're not in the position to say there is concern for access to credit from the Farm Credit perspective.” However, Auer does tell producers the best course of action is to err on the side of good business judgment saying that now is probably not the best time to ask for substantial new lines of credit to expand your business.
 
"There is the potential for rates to come up a bit based on the need for all banking institutions to have sufficient capital to be able to lend going forward.”  

 

 
You can e-mail Greg Vincent at gvincent@farmjournal.com.
 
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This article appeared in the recent issue of Top Producer's Moneywise eNewsletter. To sign up for a free subscription, click here.

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