The events of the past few weeks-the meltdown on Wall Street, the stock market crash, and the liquidity crisis in lending—calls for steady hands and even steadier nerves. This is serious sh…stuff.
Lenders I spoke to at World Dairy Expo two weeks ago say they've had bank regulators combing through their records and loan portfolios with magnifying glasses. Every "i,” every "t,” has to be dotted and crossed, sometimes in triplicate.
The regulators, these lenders say, are receiving a lot of heat for lax standards in housing loans. Now they're pushing back, making sure every loan is backed by the proper documentation. So don't be surprised if your lender wants more information from you, or an updated inventory if you haven't provided one in the past year.
Lenders I've spoken with in the last few days offer reassurance that credit is still available to qualified dairy producers. But every new loan, no matter who the borrower, will receive intense scrutiny.
"There is credit available to our clients who qualify for it,” says Greg Steele, VP of agricultural business capital for AgStar Financial Services. "Are we more cautious? We have to be. But shutting off lines of credit, that's not the case.
"The advice we're giving our clients is to be cautious and guarded because of all the uncertainties in the market,” he says. "We're looking for high levels of working capital because of all the market volatility. And risk management is going to be huge in highly leverage operations who are more at risk.”
Michael Swanson, VP and senior economist with Wells Fargo, echoes those thoughts. He also warns credit will be more expensive going into 2009, despite the Federal Reserves' lower interest rates.
That's because many banks now use the London Interbank Offered Rate (LIBOR) index (http://www.investopedia.com/terms/l/libor.asp), which is market driven. "The cost of money is going up substantially,” says Swanson.
"Over the past 20 years, that cost might move 25 basis points (0.25%) at a time. Now it's jumping more than 100 basis points each time.”
"Certainly, interest rates are currently very volatile and have increased recently,” agrees Bill Needler, senior relationship manager for dairy for Rabo AgriFinance. "It is very difficult to predict what will transpire into 2009.”
Some producers might want to lock in rates now, fearful they will go even higher. Needler urges caution: "The decision to lock in rates should be a separate issue and depends on the break-even cost of production, the producer's liquidity, cash flow and production arrangements.”
The other problem is that dairy producers are sometimes they're own worst enemies when it comes to borrowing, says Swanson. "Dairy producers don't like paying interest, so they borrow for equipment or facilities on short time frames rather than borrowing the money over the life of the asset. But that takes away working capital that might be needed in times like these,” he says.
Refinancing is sometimes an option. But that, too, can get expensive as interest rates rise and closing costs escalate.
"Each individual borrower's situation is different,” says Rabo's Needler. "We continue to consider [refinancing and extending time frames] for our qualified dairy producers where it makes good business sense.”
If expansion is in your 2009 plans, lenders are urging caution. "Our core standard at AgStar is 50% equity on expansions,” says Steele. "Forty percent is our absolute bottom, even for our best customers. And that's moving up to 45%.
"It has really turned around from a month ago,” he says. "Now, going ahead with an expansion loan might not be in our client's or AgStar's best interest.”
As harvest wraps up in the next few weeks, lenders say your next priority should probably be a meeting with them. A frank discussion of 2009 operating loan needs might not be pleasant. But now is better than later, which could turn into never.
If there's one thing lenders hate, it is unpleasant surprises. So make the call, and keep 'em happy.
--Jim Dickrell is editor of Dairy Today. You can reach him via e-mail at email@example.com.
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