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Buck Up, Borrowers, Ag Credit Could be Harder to Obtain

by Marcia Zarley Taylor
DTN Ag
American farmers could soon be facing the most challenging credit conditions in the last 25 years.

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HADDONFIELD, N.J. (DTN) — Unprecedented volatility in U.S. financial markets means American farmers could soon be facing the most challenging credit conditions in the last 25 years: Negative cash flows, higher interest costs and plunging land values. Those factors already are generating a perfect storm in growers’ finances, said Dave Kohl, professor emeritus of agricultural finance at Virginia Tech, during a DTN webinar Nov. 10.

“Credit is available, but it will be more rationed and much more selective than at any time since the 1980s,” Kohl said. “A number of lenders are very concerned about how they’re going to get credit, what it will cost and what the terms will be.” Borrowers should expect to see far more variable-rate loans and shorter terms, he added. Even farm mortgage lenders will offer far fewer 10-year, 15-year or longer fixed rates than in the recent past.

Kohl, a frequent consultant for lenders such as the Farm Credit System and agricultural banks, said farmers’ best defense for deflation was “to get their balance sheets in order and their debt under control.” In most deflationary periods, credit commands a high premium, and that will certainly be the case as the public pays for what could ultimately be a $1 to $2 trillion bailout of the financial services industry, Kohl said.

Lenders already are “pruning” marginal and weak credits from their farm portfolios, he added, and credit standards are tightening. After extreme losses at the height of the commodity market last summer, the pork industry is in a “Code Red” situation and financial retrenchment, he said. “But what you’re observing there could play out in any other industry,” including grains, if the financial recession slows feed grain and meat sales to developing countries such as China, India and parts of Asia.

Land values, which account for almost $9 out of every $10 of U.S. farm assets, are beginning to show strain for the first time in more than 20 years, Kohl noted. Where borrowers needed only a 10 percent down payment on farm real estate purchases a few months ago, today they typically need new minimums of 35 percent to 40 percent, he added. What’s more, many land auctions have stalled, due to lack of buyers in recent weeks.

“I’m not sure if land values will be negative a year from now, but appreciation is slowing,” Kohl said. “We’ve gone from the greed meter to the fear meter on land values.”

Kohl urged producers to be proactive and take steps to make themselves more attractive or “bankable” customers when they make their case to lenders this winter. Projecting negative cash flows for 2009 isn’t necessarily cause for rejection, but operators will need to make a strong case in other areas to compensate for potential losses. Among Kohl’s checklist of best practices:

— Emphasize your financial performance over a three- or five-year trend. Lenders may be willing to overlook one or two years of poor results if the long-term trend remains positive.

— Demonstrate the size of your “earned” net worth, rather than a balance sheet inflated by oversized real estate gains. A banker gives far less credence to a net worth artificially inflated by land values.

— Check your credit score and those of your spouse and business partners. You’ll need a strong score over 700 to qualify for the best terms; anything lower than 650 will put you in a difficult situation.

— Present a sound written business and marketing plan for 2009. It should include a range of what-if scenarios including items such as how a 2 percentage point jump in interest cost would affect your margins or your ability to service debt.

— Boost your liquidity levels. In the past, grain producers may have needed only working capital levels that were perhaps 15 percent of total expenses or revenues. Now operators with a large percentage of rental land will need levels closer to 30 to 35 percent to stay in the “acceptable” range.

Compared to growers in the 1980s, the top two-thirds or top half of American farmers possess much better marketing, business and management skills to handle stress, Kohl emphasized. “But lenders don’t like surprises. So sitting down with your lender and mapping out various strategies is going to be critical in this environment.”

To watch a rebroadcast of the free, 60-minute DTN webinar with Dave Kohl, “What to Do About Financial Fallout,” go to https://dtn.webex.com/…

Marcia Taylor can be reached at marcia.taylor@dtn.com


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