Agriculture Feeling the Impact of Recession

Impact of the recession on ag credit in rural communities to be felt in 2009.

Published on: Apr 21, 2009

When the market tanked in the last quarter of 2008, farmers had the cushion of the commodity price boom for a kind insulation from the collapse, according to Jason Henderson, vice president and branch executive for the Kansas City Federal Reserve. But he says the recession is catching up.

"Farmers are seeing reduced demand for farm products, lower commodity prices and shrinking profit margins," he notes. "And there are more job losses in rural places."

Henderson also notes that capital spending has slowed with the biggest struggle remaining in the livestock sector. And the demand for operating loans is up with an increase in carryover debt. "There has been a sharp increase in non-real estate loans of about $100 billion in the quarter," he says.

That increase didn't come from a greater number of agricultural loans but in the size of individual loan amounts. "With higher production costs, farmers need more," Henderson says.

Speaking to a group of ag journalists during a meeting in Washington, DC, Henderson outlined some trends that are becoming more apparent in agriculture as the recession continues. Key to that is the fact that while the risk of ag loans has been historically low, there has been a rise in delinquency rates. "That rate is still well below the 1980s," he says. "The risk to agriculture compared to other sectors is low, but we're moving in the wrong direction. We're seeing higher delinquency and higher charge-off rates."

Bankers are responding to those increased delinquency rates by adopting tighter requirements before they're going to free up money for an operation. That includes providing more information to the banker and an increase in collateral requirements (which could be cash or some other financial instrument) as a backstop to an operating loan.

In addition, bankers are tightening the maturity for most operating loans. "A lot of bankers have reached a floor for interest rates. For ag banks, the returns are strong, but we're seeing maturities for operating loans fall to one year or less in some areas," Henderson says.

Perhaps an area your banker will question you about that could be a surprise is your "other party" risk. The banker may want to know who you're doing business with, or what other obligations the farm may have. Chalk that up to trouble from ethanol plants that could be a drag, or issues related to farm suppliers that could put your farm in a financial bind.

Henderson says that your banker may ask you to get financial information about a supplier before you prepay for a service. "And have a backup plan in place [if something falls through]," he notes.

Going forward, you and your banker will have to keep a close watch on your farm's financial situation.