Outlook: Banks Still Have Money, But . . .

Rural banks not feeling the squeeze but they aren't immune.

Published on: Jan 6, 2009

By Brian C. Briggeman, Oklahoma State University & Danny Klinefelter, Texas AgriLife Extension

Every time someone picks up a newspaper, listens to a radio talk show, or watches the news, they are sure to find someone discussing the financial crisis and the deteriorating economy. Many economists agree that two key factors have led the U.S. into our current state of affairs: 1) the housing market bubble bursting and, 2) 'bad' mortgages backed by financial derivatives that have deteriorated thus freezing credit markets and creating much unrest in global financial markets.

Of course, there are additional factors impacting our down economy and governments around the world are implementing plans to try and thaw credit markets and pull the global economy out of its downward spiral. However, the question still remains, what does all of this mean for agriculture and, in particular, the Farmer-Stockman readership?

For the most part, many banks, especially rural banks that lend to agricultural producers in Oklahoma and Texas have not felt the credit "squeeze" discussed around the nation but this is not to say these banks are completely immune to effects of tightening credit markets. Creditworthy borrowers, those with strong financial positions and good income track records, should still be able to borrow what they need. However, interest rates, down payment/equity requirements are increasing, stronger capital debt repayment capacity margins are becoming more important, and loan terms are shortening. Given all that is happening, do not be surprised if your lender asks for additional sources of financial information and cash-flow projections before making a loan.

The uncertainty in financial markets and the economic downturn are already causing lenders who compete in the nation's markets for funding and deposits to pay higher rates to attract those funds. The interest rate yield curve has changed from being relatively flat to increasing significantly for longer term rates. Even though amortization periods of 15-25 years may still be available, prudent lenders are going to require shorter note maturities in order to keep their loan portfolios marketable and to manage their own asset:liability price risks. Borrowers will likely find that it also makes sense for them to shorten maturities as well because fixing longer term rates will be significantly more expensive.

Credit markets aside, farm income in 2009 will likely decline from the record levels of 2006-2008 because long periods of high incomes are not sustainable given the normal cycle of a commodity based industry. Land values are at record levels and whether land values actually fall will depend on the length and depth of the recession in the general economy, how much farm income declines, and whether tighter credit and lower income will result in an increase in properties on the market. Any build-up in the inventory of properties for sale would obviously have a depressing effect on land prices. The effect would be compounded if able buyers elected to sit on the sidelines because they believed prices were going to go lower. The reality is that investor psychology is a very important factor in determining both the upside of bull markets and the downside of bear markets.

The basic message is that agricultural producers need to increase their emphasis on financial and risk management. Now is not the time to be leveraging up or over-committing debt repayment capacity based on the assumption that recent levels of farm profitability will continue over the next few years. Getting debt structured properly, improving working capital and managing costs will be at a premium. Managing downside commodity price and yield risk will be as important to sustainability as minimizing taxes and trying to capture market highs.

Last but not least, get your planning for next year done and start communicating with your lender earlier than you typically have. Know where you stand.