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Ag lending a bright spot in economy

10/11/2012 @ 3:01pm

While economic uncertainty is threatening to slow business expansion and loan demand, the banks that begin reporting third-quarter earnings later this week will likely reveal at least one sector where borrowing is on the upswing: food producers.

Rising prices for corn, soybeans and other agricultural commodities are increasing the financing needs of food-related businesses, including meat producers, grain merchants and makers of breakfast cereals, according to bankers.

The drought that plagued large swaths of the U.S. heartland this summer resulted in another sharp increase in the price of corn and other commodities. Further, "there is already talk of a drought next year," which could make it difficult to rebuild corn supply and push prices down, says Elizabeth Hund, an agricultural banker at U.S. Bancorp (USB) in Minneapolis.

"It's one thing if I have to buy $8 corn [per bushel] for a few months" as a grain merchant or meat producer, says Ms. Hund, who runs lending to millers, grain merchants and food companies with $500 million or more in revenue. "But if I have to pay $8 for corn for the foreseeable future, that changes the business model."

For decades, corn prices had remained fairly steady at around $3 per bushel. Prices started rising in 2007, and became more volatile, due to rising demand for corn. On Thursday, corn futures were trading at $7.74 a bushel according to data provided by FactSet, up about 20% this year.

The result: "Bigger lines [of credit] and terms as long as [borrowers] can get. We are seeing that across the board" among the meat industry and food manufacturers, she says.

"Most of your increase in loan demand is coming from the protein and dairy sector," says Roger Sturdevant, the head of agricultural banking at Bank of the West in San Francisco.

For dairy producers, the cost of feed makes up about half their overall expenses and "that increase in input costs needs to be financed, typically borrowed," he says. Milk prices have been lagging the increase in commodity prices, he says.

Ultimately, higher commodity prices help farmers, who overall are in good financial shape, according to bankers at U.S. Bancorp and Bank of the West.

However, rising prices for fuel, fossil-fuel-based fertilizer and the cost of seeds "are higher almost across the board as well," says John Elmer, U.S. Bancorp's head of community banking, the unit that makes most farm loans.

Those increasing input costs, in addition to rising prices for farmland, resulted in more loan demand from farmers. In addition, more land is planted with corn and beans, which also required more loans as upfront financing, bankers say.

Loans to farmers and dairy and meat producers are broken out in regulatory filings as loans to finance agricultural production and are separate from loans secured by farmland.

Overall agriculture loans at banks, thrifts, and credit unions rose 11% in the second quarter from a year earlier, according to SNL Financial. Bankers expect demand for agricultural loans to continue to increase.

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