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Ag credit not immune from financial crisis

Agriculture.com Staff 06/12/2009 @ 9:30am

Agricultural lending is a long way from suffering the problems of the 1980s, bankers and members of the Farm Credit System told a House Agriculture Committee hearing Thursday, but the problems of big banks have filtered down to an industry whose borrowers, especially dairy, hog and poultry producers, are facing tight margins, even losses.

The leading indicator of stress could be the USDA Farm Service Agency, which makes loans to farmers unable to qualify for credit elsewhere.

In testimony prepared for the committee, FSA Administrator Doug Caruso, said, “This year, the programs are experiencing demand levels that have not been seen in over 20 years.”

As of May 30, demand for FSA direct operating loans was up by 81% and direct ownership loans was up 132%. FSA also guarantees bank and Farm Credit System loans and those guaranteed loans were up by almost a third.

The Farm Credit System’s borrowers still have strong balance sheets, the committee was told, but it, too has been affected. About 10% of FCS institutions have seen their financial soundness ratings from the regulator, the Farm Credit Administration, drop. But according to FCA Chairman Leland Strom, they represent just 3% of loan volume.

Bob Frazee, President of Mid-Atlantic Farm Credit based in Westminster, Maryland, agreed that the Farm Credit System remains sound, with most borrowers still having strong balance sheets. But some borrowers in his district, especially broiler producers and dairy farmers, have suffered losses.

And, because Farm Credit secures funds for lending by selling bonds, it has been affected by the nation’s banking crisis.

“Because we issue debt in the national financial markets, their problems have been disruptive to us,” he told the committee.

The System has not been able to sell bonds with more than five-year terms since the banking crisis of late last year. But so far, Mid-Atlantic has been able to offer loans with longer terms, Frazee told Agriculture Online after the hearing.

But Mid-Atlantic is able to offer better rates for loanswith three to five year terms to its farmer borrowers. “The reality is that most of the time they’re looking to roll over debt anyway,” he said.

However, as part of the financial analysis of pending loans, Mid-Atlantic also looks at how the farm’s condition would be affected by higher interest rates.

When asked how the financial performance of Mid-Atlantic and its borrowers appears at this point, Frazee told Agriculture Online that the poultry industry may be starting to recover and that the lender’s earnings in the first quarter of this year were better than expected, even though they were lower than the year before.

“I wouldn’t want anybody to assume I am irrationally exuberant when there are so many clouds out there, but we’re not seeing things fall off the cliff like they might have six months ago,” he said.

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