Plenty of Money in the Bank

November 26, 2013 06:42 PM
Plenty of Money in the Bank

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.

The likelihood that crop insurance’s revenue protection guarantee at 80% coverage for corn could drop from about $5 per bushel this year to about $3.80 for 2014 means increased risk. Bankers want to make sure customers are focused on reducing the risk.

 For the past two years, many farmers have waited until February’s futures price before doing any
marketing. "If you wait for that next year, you might wait too long," says Iowa’s Hein. "Crop insurance was never meant to be a marketing plan."

Lenders say corn at $4 to $4.50 per bushel catches break-even for most farmers, but the actual range is $3.75 to more than $5. This variation is largely due to differences in land values and rents, but other costs and efficiencies influence it, too.

"Whether farmers can manage the cost side to make $4 corn work is yet to be determined," Franzen says. He is honing in on ratios and balance sheets, and he wants to know how clients will manage with corn at $4 instead of $7. Franzen wants to know the break-even point, projected profit per acre and target market prices.

He will also ask questions to help farmers identify cost-savings opportunities, such as if one or two passes through the field can be eliminated. Can you get by with less labor or less fertilizer? "Just having the conversation on costs and management helps farmers think about it," Franzen says.

Dual Pictures. There are two distinct financial situations. One is that crop farmers are well positioned to weather a period of tight margins and enjoy the strongest working capital and cash reserves in decades. The other holds that the reserves aren’t actually there because the cash has been spent on land, upgrading equipment, grain bins and other items.

However, Kreg Denton, First Community Bank senior vice president in Fancy Farm, Ky., says that those who see higher debt as a problem are thinking about things wrong. "Land values have more than doubled in past five to six years," Denton says, acknowledging that there is a lot of debt on the books. But he says the debt correlates with the rising value of assets.

Bankers also admit to being uneasy that interest rates could increase at the same time crop prices go down. It goes without saying that land values also weigh heavily on bankers’ minds and influence credit policies.

"Things will level off, but I don’t think land will go down next year," Franzen says. If land does go down, it would occur later, stemming from several years of low commodity prices and higher interest rates.

Denton’s more optimistic. "Land values will stay strong," he says. "For the bottom to fall out of the land market, it would take $3 corn and $7 soybeans." 

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