WEST LAFAYETTE, Ind. — The good news back on the farm is that growers and ranchers haven't been hit-so far-as hard as their city cousins in the current economic climate when they seek business loans.
But signs are that is changing, and experts say 2009 will be a time to keep a close eye on trends and know, really know, your borrower. Fortunately, that doesn't seem to be a problem for credit unions with significant portions of their loan portfolios in agriculture. Credit Union Times found the ag lending staff at those credit unions definitely seem to know the industry and their borrowers.
That's important, suggested Michael Boehlje, professor of agricultural economics at Purdue University.
“The key issue lenders need to be cognizant of is to be asking borrowers for as much information as possible in terms of their income-generating capacity, what their income was in 2008 and not relying exclusively on tax returns,” he said.
“Evaluating cash flow and debt servicing capacity in 2009 will be vital. Lenders are going to have to be more cautious and sometimes say '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 the business climate relative to costs, prices and so on,” he said.
“With respect to the first issue, generally most of the lenders that have been servicing the agricultural sector have not had as much of a problem accessing funds as lenders in other sectors such as the housing market or construction.”
As for costs, prices and demand, farmers and ranchers have seen profit margins compressed, raising concerns about the business climate. Lower incomes and higher costs may cause lenders to be more cautious.
What about the value of farmland? Homeowners in most cities and suburbs have seen the prices their homes can command drop. What's happening on farms and ranches?
Concrete evidence is not yet available, Boehlje indicated. However, early indications point to a pause in the market, and some pockets of softness, even if not as widespread and deep as the housing market.
Insights like that are vital to credit unions such as Central Minnesota Federal Credit Union, Melrose, Minn., the largest federal agricultural lending credit union in the United States. Chad Van Beck, business lending manager, noted, “We've had a tremendous year. At the beginning of 2008, we budgeted $29 million in loan growth. We actually had $45 million in growth. We are at the point where we are more selective, at least as far as new credit.”
“Things are changing,” he continued. “Crop prices are down, and milk prices are dropping. Yet input costs have not dropped as much, so operating costs are higher than what they should be. I've been doing this for 15 years, and $13 to $15 [per hundredweight] for milk was pretty decent. In late 2007 or early 2008, we saw $20 milk prices, which was great. Two days ago when I looked, January milk futures were at $11.”
Van Beck readily cites those figures because the biggest portion of CMFCU's ag lending portfolio is in dairy farms. In fact, the credit union is headquartered in Stearns County, Minn.'s leading dairy county and in the top 10 nationwide. Operations range from 50 cows to 1,000 cows. A farmer with 1,000 head can be carrying $6 million in loans. Land which cost $1,000 an acre 15 years ago has been selling for $3,000 to $3,500 an acre, and although sales are slow this time of year, Van Beck hasn't seen those prices falling.
Van Beck does observe farmers facing a credit crunch because when banks and credit unions tighten lending standards in general, that trickles down to agricultural loans.
Headquartered in Madison, Wis., Heartland Credit Union serves southwest Wisconsin and eastern Iowa. HCU has about $35 million in ag and other business loans, about 20% to 25% of the loan portfolio.
If you walk into the High Crossing branch seeking a farm loan, you'll probably talk to Nathan Russell. You will quickly discover he should know what he's talking about. Russell was raised on his family's seventh-generation dairy and cash grain farm, which today has 300 pasture-raised milk cows, 7,000 acres of cash grain, a soybean conditioning facility and a trucking enterprise. Russell has a degree in agricultural economics from the University of Wisconsin 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 ag lending, is almost directly tied to the price of oil. So as the price of oil has dropped over the past few months, so have corn prices.
“The biggest issue is that suppliers, primarily those who provide fertilizer which is heavily oil-based, bought contracts back in July and August when oil was very, very high,” he said.
“A lot of farmers were able to market corn when prices were at record highs. Now, going into 2009, there's a bottleneck of fertilizer at really high prices. Producers have built a lot of equity in farmland, and what we might need to look at is that some farmers may tap into that equity if input prices stay high and commodity prices remain low. One thing we'll have to look at as a lender is the question of using that equity over the course of the next year or two to allow our producers to get through this time.
“A lender has to be even more in tune with their members by being able to talk with them on a regular basis and making sure they, as a lender, understand the operation they're dealing with and that the lines of credit are adequate.”
Bruce Bergeson, senior ag loan officer at Dawson Co-op Credit Union in Dawson, Minn., is also looking ahead at 2009. Despite a bad storm in July 2008 that affected crops, last year was “a somewhat decent year, not a terrible year,” he said. Agriculture accounts for 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 of loans we have, but the amount of the loans will probably be higher, mainly due to the considerably increased cost of input such as seed and fertilizer.
“A lot of borrowers are limited to shopping around, depending on their financial position. I don't see a lot of lenders going out trying to get more ag loans, because there's a fear that the next sector 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 we want to keep the customers we have and do a good job for them.”
Bergeson estimated about 75% of Dawson Co-op CU ag borrowers are people 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 sales that did take place tended to be for 2007 prices or higher.
Now, “with the tightening of the economy as a whole and grain prices dropping off, I don't foresee it going up. I've read that we could 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 with agriculture is the fact it takes three times as much money to operate a farm today as it did four or five years ago. That increases risk, but at the same time successful farmers have been able to boost their net worth.
Overall, looking at 2009, “I'm concerned,” Bergeson said. “Cash will be tighter. I'm worried about exports being soft. If corn can stay in the $4.50 to $5 range and beans in the $10-plus range, farmers can still make money. On the whole, farmers are tightening their belts. I think farming can be profitable in 2009, but it's not going to be as easy as it was last year.”
Ken Vik, chief lending officer at Dakota Plains Federal Credit Union in Lemmon, S.D., noted farmers and ranchers in his area have been doing fairly well despite drought conditions posing problems the 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 loans account for 60% of the portfolio. Although underwriting standards may be a little higher, he anticipates most ag borrowers will be able to get the loans they need.
“It's very different than consumer loans,” Vik said. “It's very cyclical. A loan of $70,000 to $150,000 is not really unusual, and that's not taking into account some of the largest operations around.”
–ecourter@cutimes.com

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After a Good 2008, Agricultural Loans Now Call for Special Diligence in 2009

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