Farms, Banks Buoy One Another in Tough Economy

August 3, 2011

Farm Bill to Determine Future Success

Stories about the post 2008 credit crunch conjure up immediate feelings of anxiety and churning stomachs as many remember what was the worst financial crisis since the Great Depression of the 1930s.

Banks that survived the crash became much more stringent about who they provided loans to.  Consumers wishing to purchase homes waited while their credit histories were pored over and many businesses seeking financing were put on hold.

Agricultural loans were closely scrutinized as well, but thanks to strong balance sheets and proven federal farm policies, farmers were able to obtain needed capital.

In fact, the private banking system extended $123.5 billion in farm loans (more than 50 percent of the total U.S. farm credit), as of year-end 2008, according to the American Banking Association.

As a result, agriculture’s success grew and helped prop up an otherwise struggling economy—including the banking system.  Agriculture lenders fared much better than the banking industry as a whole with only three farm banks failing in 2008 compared to 25 FDIC insured banks.

After 2008, the successful relationship between bankers and growers continued to thrive.   Demand for agriculture credit rose, and the banks continued to loan needed capital, and agriculture extended its successful run—a trend that was picked up by a 2010 Federal Reserve of Kansas City white paper that read, “In 2010, rural America was at the forefront of the economic recovery.”

While on the surface this might look like an unbridledsuccess story, the situation is tenuous and future prosperity could hang in the balance of decisions being made right now on Capitol Hill.

The Federal Reserve recently warned in a follow-up paper, “Farmers have significantly increased their debt level—the fastest increase since the prelude to the 1980s farm debt crisis. If farm financial conditions were todeteriorate rapidly, no producer would be immune to rising financial stress.”

In a nutshell, should prices suddenly plummet or natural disasters strike—both of which have happened numerous times in the past—farmers will be exposed to massive losses and possibly bankruptcy unless an adequate farm policy remains in place to act as a backstop.

That’s why lenders will be watching Congress closely as they debate the upcoming farm bill, according to Jonathan Logan, senior vice president of the corporate agribusiness banking group for CoBank, a major lender in rural America.

An article he penned in March noted: “Rural America is truly one of the nation’s bright spots, a strong economic engine that is delivering significant results despite the more difficult outlook for the broader U.S. economy. Congress should seek to maintain the momentum of this vital sector as it crafts the next farm bill.“

Kevin Wedgworth, a lender at the Bank of Belle Glade in Florida, agrees and came to Washington in July to personally deliver the message to lawmakers.

“We need certainty, and in a risky business, farm policy provides some semblance of certainty,” he said.  “We know how important a strong farm policy is to farmers’ ability to repay loans. We know how important farmers’ operating capital is to growing the crops needed to fuel America’s recovery.”

The same week Wedgworth was on the Hill, Iowa banker Alan Rosendahl told a similar story in an opinion editorial for the Cedar Rapids Gazette.

“Loaning money to small and beginning farmers can be very risky, because they often have less net worth, and tighter cash flows,” he wrote.  “[F]ederal crop insurance bridges the risk problem because the policy itself serves as the collateral that the farmer needs to secure the loan, lowering or eliminating the risk to the bank altogether and ensuring the loan is made.”

Whether or not Congress will get the message is yet to be determined, but it is clear that a lot more than the livelihoods of a few farmers hangs in the balance.