Agricultural lenders have a clear message for their farm customers: "We're open for business.”
As the financial crisis unfolds across the globe and credit concerns continue to stymie the world's economy, U.S. farm country is in pretty good shape in terms of lending and access to capital. There are just three basic things to keep in mind as you look to secure financing for your 2009 crop:
• Banks do have money to lend.
• Farmers can get it.
• Have your ducks in a row when visiting the banker, because the rules will change fast.
The new rules. John Blanchfield, director of the American Bankers Association's agriculture group, does issue a caveat: Expect regulatory overreaction from Washington. "I'm telling producers not to walk into the bank thinking it's business as usual, because the regulatory environment is shifting,” he says. "Producers may get more questions than ever before. They may be asked to have a written marketing plan, or the banker may need the serial numbers on all the tractors. I want people not to take that personally.”
Jason Henderson, Omaha branch executive and economist with the Federal Reserve Bank of Kansas City, says such questions are natural when potential profit cuts are as deep as they've been the past few months.
"When you get the corn futures price near $8/bu. a couple months ago and now it's dropping below $4, you're going to get bankers asking a lot of questions,” he says. "For one thing, they're asking producers to put in risk management strategies. Bankers have seen an increase in risk, so they're doing due diligence by making sure producers have a way to deal with that risk.”
The good news through all this, Henderson says, is relatively strong margins the past couple of years, and most farmers took advantage by paying down debt. He expects farm and bank debt loads to continue declining through 2008, but he's taking a wait-and-see approach to 2009.
Liquidity outlook. During a recent Top Producer Webinar, Pete Arendt of the Bank of Oklahoma said local banks should stay in good shape through next year, while the market sorts itself out.
"This thing could break one of two ways,” he said. "It could get worse, but I think it's already improving. If it breaks the other way, there could be a lot of capital available to lend in the next six to 12 months. Most farm community banks and Farm Credit Banks could be in a position where that liquidity makes it through and they're able to fund.”
Fresno-based Curt Covington, a senior vice president at Bank of the West, says farmers need to ask questions to make sure their banker will be around for the long term. "It's OK to ask your banker about his institution's financial health. You can get financial statements; you can check with your state banking departments or online resources to tell the financial condition,” he explains. "And I think a good question to ask is, ‘If you commit to lend to me, do you have a long-term commitment to this industry and will you provide capital for my business during the tough times?' The next thing I would ask is, ‘Have your lending policies and procedures changed as a result of the liquidity crisis over the last 90 days?'”
Covington says asking general questions about a bank's overall lending practices may also give you an idea of its stability.
"Don't worry about insulting the banker,” Blanchfield says. "You're just talking about your business and your business's financial need. In fact, there is nothing wrong with producers having a very frank discussion with their banker about the safety and soundness of his institution.”
Cost of money. In the short term, Covington says, rates will not likely rise. The London Interbank Offered Rate (LIBOR), typically the rate banks use to loan each other money, was below 4% in late October. Even after premiums and markups, rates are still historically low and could go lower with prospects of further rate cuts by the world's central banks.
"Is the spread between the cost of funds and what the borrower even-tually pays going to increase? The answer is yes, because in virtually all banks, there is some liquidity problem,” Covington says.
The actual cost will be slightly higher than the listed LIBOR because banks will borrow a mix of short- term and long-term money, which will require a premium. For example, if LIBOR is at 4%, Covington says, the borrower might borrow money at 6%, depending on the bank and the terms of the loan.
Arendt is closely watching government-sponsored entities like the Farm Credit System (FCS). To date, the federal government and the Treasury have not backed the bonds that fund FCS. "They have been impacted. We have many situations where we buy or sell bank loans with the Farm Credit System.” Of course, these commitments are always contingent on funding.
Couple that situation with the outlook for tighter margins next year, and Arendt sees some reason for concern. "There is lender and press conversation about the much-reduced commodity prices putting a squeeze on producers, especially if we don't get a corresponding adjustment in fertilizer prices and other inputs. All of that portends tougher underwriting for ag lenders next year,” he told the Webinar.
To date, money is flowing through the FCS, which funds nearly a third of all production loans. Farm Credit Council President and CEO Ken Auer says the system is upholding its congressional mission to provide financial services to farmers. "We're not in a position to say there's concern for access to credit,” he says. 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.
To contact Greg Vincent, e-mail GVincent@farmjournal.com.
Top Producer, November 2008