Can the credit crunch hit agriculture?
Oct 06, 2008
Chore time for me isn't what it used to be when I was growing up on our eastern Iowa farm, but taking care of two horses in the morning before I head in for work gives me a little time to think about the day ahead. Each morning, stop at this spot to get a feeling for the "tone of the day" - and some attitude about agriculture and the markets.
I was thinking…
... there's really not much more to think about right now than everything that's happening in the credit crisis around the globe.
Fear, anxiety, rush to cash -- it's all happening in the financial markets right now. Right now, banks simply don't trust each other and until that trust is rebuilt, credit will remained seized up. But, credit is not as tight as some of the doom-sayers would have you believe. For example -- I know some people can get a car loan. According to some, you wouldn't think anybody could get a loan for anything.
Small banks... and especially rural banks... seem to be doing "okay." Many are still getting loan requests and many are still approving loans for everything from cars and trucks to boats, operating loans and land or house purchases.
That, however, does not mean "everything" is okay in the financial system of rural America. Business operators are dealing with the impacts of a credit crunch and it won't be surprising to hear stories of how some small businesses won't be able to make payroll, etc. And for every new car or truck that is sold, it will probably take a while before that dealership is willing to replace it.
I haven't talked to a lot of rural banks, but those I have talked with indicate they are still very willing to make loans to farmers for operating funds to harvest and market 2008-crop corn and soybeans and they are willing to write 2009-crop operating loans.
In last week's Pro Farmer, we asked the question, "Can agriculture get caught in credit crunch?" Here's how we answered the question:
"Absolutely... agriculture can get caught in the credit crunch. A more appropriate question might be, "Will ag get caught in the credit crunch?
"You know the old saying -- land rich and cash poor. After years of buying ground (with a lot of cash), U.S. agriculture is left with a very low debt-to-asset ratio of about 9%. A tight debt-to-asset ration does not, however, remove the need for operating loans... it just means growers have been able to repay those loans in full and on time. Farmers, on a whole, currently have a very good credit rating and are an attractive 'target' for lenders: Low debt, lots of assets, lots of revenue, lots of expenses (high borrowing needs) and the ability to repay loans."
USDA Sec. Ed Schafer last week said he is concerned the credit crunch could "have an effect on ag production." How? Well... if growers can't get the operating loans for 2009 production, they'll obviously have to cut back on some inputs... and EVERYBODY seems to be thinking growers will cut back on fertilizer use in 2009. Just look at the stock values of companies like Mosaic Companies, Potash Corp Saskatchewan and Terra Nitrogen Companies. While nearly all stocks plunged last week (and today), the stock prices on fertilizer companies really dove last week as nearly every "street analyst" is looking for lower U.S. fertilizer demand for 2009.
Pro Farmer crop consultant Dr. Cordonnier tells us Brazilian fertilizer use is down for the 2008-09 crop -- some growers are reportedly cutting fertilizer rates by as much as 25% to 30% from normal levels. If that ground built up some fertility reserves over the years (not likely), Brazilian farmers that have grown beans, on beans, on beans, on beans, etc... might not see much of a hit on this crop, but they could on next year's crop. And, it's not likely that ground built up much "reserve fertility," so they will probably see the yield hit this year if the reduced fertilizer use is an industry-wide happening.
But, let's get back to the credit crunch... and availability of credit here in the U.S. for farmers. So far, it looks like growers are able to get the funds they need to conduct business. So, while there is a meltdown happening in some U.S. industries, the ag industry still seems to be functioning. If you're hearing anything different, please let me know.