WEST LAFAYETTE, Ind. — The good news back on the farm is thatgrowers and ranchers haven't been hit-so far-as hard as their citycousins in the current economic climate when they seek businessloans.
But signs are that is changing, and experts say 2009 will be a timeto keep a close eye on trends and know, really know, your borrower.Fortunately, that doesn't seem to be a problem for credit unionswith significant portions of their loan portfolios in agriculture.Credit Union Times found the ag lending staff at those creditunions definitely seem to know the industry and theirborrowers.
That's important, suggested Michael Boehlje, professor ofagricultural economics at Purdue University.
“The key issue lenders need to be cognizant of is to be askingborrowers for as much information as possible in terms of theirincome-generating capacity, what their income was in 2008 and notrelying exclusively on tax returns,” he said.
“Evaluating cash flow and debt servicing capacity in 2009 will bevital. Lenders are going to have to be more cautious and sometimessay 'No.' Due diligence will be really, really critical.”
Boehlje cited two different questions facing ag lending.
“One is access to funds, credit availability. The second is thebusiness climate relative to costs, prices and so on,” hesaid.
“With respect to the first issue, generally most of the lendersthat have been servicing the agricultural sector have not had asmuch of a problem accessing funds as lenders in other sectors suchas the housing market or construction.”
As for costs, prices and demand, farmers and ranchers have seenprofit margins compressed, raising concerns about the businessclimate. Lower incomes and higher costs may cause lenders to bemore cautious.
What about the value of farmland? Homeowners in most cities andsuburbs have seen the prices their homes can command drop. What'shappening on farms and ranches?
Concrete evidence is not yet available, Boehlje indicated. However,early indications point to a pause in the market, and some pocketsof softness, even if not as widespread and deep as the housingmarket.
Insights like that are vital to credit unions such as CentralMinnesota Federal Credit Union, Melrose, Minn., the largest federalagricultural lending credit union in the United States. Chad VanBeck, business lending manager, noted, “We've had a tremendousyear. At the beginning of 2008, we budgeted $29 million in loangrowth. We actually had $45 million in growth. We are at the pointwhere we are more selective, at least as far as new credit.”
“Things are changing,” he continued. “Crop prices are down, andmilk prices are dropping. Yet input costs have not dropped as much,so operating costs are higher than what they should be. I've beendoing this for 15 years, and $13 to $15 [per hundredweight] formilk was pretty decent. In late 2007 or early 2008, we saw $20 milkprices, which was great. Two days ago when I looked, January milkfutures were at $11.”
Van Beck readily cites those figures because the biggest portion ofCMFCU's ag lending portfolio is in dairy farms. In fact, the creditunion is headquartered in Stearns County, Minn.'s leading dairycounty and in the top 10 nationwide. Operations range from 50 cowsto 1,000 cows. A farmer with 1,000 head can be carrying $6 millionin loans. Land which cost $1,000 an acre 15 years ago has beenselling for $3,000 to $3,500 an acre, and although sales are slowthis time of year, Van Beck hasn't seen those prices falling.
Van Beck does observe farmers facing a credit crunch because whenbanks and credit unions tighten lending standards in general, thattrickles down to agricultural loans.
Headquartered in Madison, Wis., Heartland Credit Union servessouthwest Wisconsin and eastern Iowa. HCU has about $35 million inag and other business loans, about 20% to 25% of the loanportfolio.
If you walk into the High Crossing branch seeking a farm loan,you'll probably talk to Nathan Russell. You will quickly discoverhe should know what he's talking about. Russell was raised on hisfamily's seventh-generation dairy and cash grain farm, which todayhas 300 pasture-raised milk cows, 7,000 acres of cash grain, asoybean conditioning facility and a trucking enterprise. Russellhas a degree in agricultural economics from the University ofWisconsin and a law degree.
Overall, Russell indicated farmers in his area had been doing“very, very well.” However, corn, the No. 1 commodity in HCU aglending, is almost directly tied to the price of oil. So as theprice of oil has dropped over the past few months, so have cornprices.
“The biggest issue is that suppliers, primarily those who providefertilizer which is heavily oil-based, bought contracts back inJuly and August when oil was very, very high,” he said.
“A lot of farmers were able to market corn when prices were atrecord highs. Now, going into 2009, there's a bottleneck offertilizer at really high prices. Producers have built a lot ofequity in farmland, and what we might need to look at is that somefarmers may tap into that equity if input prices stay high andcommodity prices remain low. One thing we'll have to look at as alender is the question of using that equity over the course of thenext year or two to allow our producers to get through thistime.
“A lender has to be even more in tune with their members by beingable to talk with them on a regular basis and making sure they, asa lender, understand the operation they're dealing with and thatthe lines of credit are adequate.”
Bruce Bergeson, senior ag loan officer at Dawson Co-op Credit Unionin Dawson, Minn., is also looking ahead at 2009. Despite a badstorm in July 2008 that affected crops, last year was “a somewhatdecent year, not a terrible year,” he said. Agriculture accountsfor 50% to 60% of the credit union's loan portfolio.
As for ag loan demand this year, “I don't see it going down any,”Bergeson predicted. “I don't know if we'll increase the number ofloans we have, but the amount of the loans will probably be higher,mainly due to the considerably increased cost of input such as seedand fertilizer.
“A lot of borrowers are limited to shopping around, depending ontheir financial position. I don't see a lot of lenders going outtrying to get more ag loans, because there's a fear that the nextsector of the economy that is going to get tighter is agriculture.I don't see us as lenders out there fighting each other. We feel wewant to keep the customers we have and do a good job forthem.”
Bergeson estimated about 75% of Dawson Co-op CU ag borrowers arepeople he has worked with for 10 years.
As for equity in farmland, farmland prices are stabilizing.Bergeson didn't see quite as many sales in 2008, but those salesthat did take place tended to be for 2007 prices or higher.
Now, “with the tightening of the economy as a whole and grainprices dropping off, I don't foresee it going up. I've read that wecould see a 10%, maybe even 15% or 20% decline, in land prices.That wouldn't surprise me at all,” he said.
Bergeson believes what would amaze people not familiar withagriculture is the fact it takes three times as much money tooperate a farm today as it did four or five years ago. Thatincreases risk, but at the same time successful farmers have beenable to boost their net worth.
Overall, looking at 2009, “I'm concerned,” Bergeson said. “Cashwill be tighter. I'm worried about exports being soft. If corn canstay in the $4.50 to $5 range and beans in the $10-plus range,farmers can still make money. On the whole, farmers are tighteningtheir belts. I think farming can be profitable in 2009, but it'snot going to be as easy as it was last year.”
Ken Vik, chief lending officer at Dakota Plains Federal CreditUnion in Lemmon, S.D., noted farmers and ranchers in his area havebeen doing fairly well despite drought conditions posing problemsthe past couplew years and profit margins squeezed.
With rising input costs, Vik expects to see ag loan demand grow 10%to 15% in 2009. That's important to the credit union since ag loansaccount for 60% of the portfolio. Although underwriting standardsmay be a little higher, he anticipates most ag borrowers will beable to get the loans they need.
“It's very different than consumer loans,” Vik said. “It's verycyclical. A loan of $70,000 to $150,000 is not really unusual, andthat's not taking into account some of the largest operationsaround.”
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