Farmers' new trouble at the ranch: tighter credit

[October 18, 2008]    LUBBOCK, Texas (AP) -- There is new trouble at the ranch. The worsening financial crisis is making it harder and more expensive for farmers and cattlemen to borrow money to pay for feed, land and salaries. While the credit squeeze on the agricultural sector is buffered somewhat by subsidies and other federal assistance, the timing is nonetheless bad: The costs of fertilizer, fuel, seed and equipment have all risen sharply in recent years, and a global recession is on the horizon.

"Other than the sky is falling, I'm OK, I guess," said West Texas rancher John Welch, who manages 10,000 head of cattle.

With confidence dwindling in borrowers' ability to repay loans, banks are requiring more collateral and higher interest rates from crop farmers, ranchers and meat processors, said Carl Anderson, an agricultural economist at Texas A&M University. "The bankers are turning conservative."

This is the toughest lending environment farmers have faced in about 25 years. At the same time, the agricultural sector has historically done better than other industries during a recession because of the local lenders' familiarity with the area, the safety net provided through farm bill programs and producers having crop and revenue insurance coverage.

In response to the lending crunch, farmers and ranchers are expected to rein in costs wherever they can -- whether it means using less fertilizer, restructuring debt or putting off new equipment purchases.

While the weakening global economy is putting downward pressure on fuel prices, it is also depressing the value of grains and livestock -- and that will eat into farmers' and ranchers' pocketbooks. The upside for consumers is that food prices are likely to come down.

Rancher Jay O'Brien of Amarillo, Texas, said he and others like him are bracing for emotional discussions with bankers on the assumption that it will be much more expensive to borrow for 2009 than it was a year earlier. Some cattle producers already are having difficulty getting loans large enough to make deposits at feed yards.

"The loans are probably twice (the amount of) what they were a year ago, or two years ago," said Monty Whipple, who grows corn and soybeans near Utica, about 90 miles southwest of Chicago and relies on a revolving line of credit to pay for things like seed and chemicals.

Lane Broadbent, a livestock analyst at KIS Futures in Oklahoma City, said some bankers are already reluctant to finance cattle, which have been a money-losing business for many ranchers in recent years because of higher feed costs and drought.

"It's frustrating for these cattle guys to not to be able to borrow as much money as they need," Broadbent said.

That said, the agricultural sector won't be frozen out of credit markets entirely. For starters, the industry's traditional lenders -- independent commercial banks -- are on more solid financial footing than the country's largest investment banks and commercial banks, which have suffered the most in recent months from mortgage-related losses.

Moreover, federal assistance programs put in place in response to the country's farm crisis of 1919 are still active, helping the industry weather the current crisis.

Provisions in the Farm Bill, portions of which grew out of the Agricultural Adjustment Act of 1933, give the industry special access to government-backed loans that are nearly fully guaranteed by the U.S. Department of Agriculture's Farm Service Agency.

Many farmers rely on Farm Credit Services, a lending cooperative that specializes in agricultural loans and should be somewhat insulated from the troubles on Wall Street, according to Iowa State University agricultural economist Bruce Babcock. Those who can't get loans privately borrow directly from the USDA agency, which last year lent $3.3 billion to about 26,000 farmers.

Jimmy Dodson of Robstown, Texas, a director of Farm Credit Bank of Texas, said the cooperative lender he works for hasn't felt any direct effect yet, but added: "If it's not dealt with soon, it'll be felt far from Wall Street."

Gary Niemeyer, who grows corn and soybeans in Auburn, Ill., said U.S. farmers are in a better position to insulate themselves from a credit crisis than they would have been a generation ago, mainly because they've learned to keep their debt levels in check.

Farmers enjoyed high commodity prices in the late 1970s, he recalled, and many, including himself, took on debt to buy land to expansion. They paid a heavy price when commodity prices and land values declined just a few years later, during the farm crisis of the early '80s

"A lot of people lost a lot of money in that timeframe and went out of business," said the 60-year-old Niemeyer. "There's a lot of them that have that memory and don't want to go there."

Everyone from crop farmers to livestock producers will be paying more for money they borrow on top of production costs which have been climbing in the past few years.

"I would say that everybody's pretty cautiously concerned," said Don Langston, a longtime cotton producer in Texas, the nation's leading producer of the fluffy fiber and the nation's No. 2 agricultural state.

Agriculture economists say farmers will simply need to adjust, whether that means looking for operational efficiencies, selling assets to raise cash or purchasing crop insurance to make sure they can repay loans.

There is a bright spot in all this for meat eaters, economists said. An anticipated decline in demand from overseas means there should be plenty of beef, at reasonable prices, for U.S. consumers.

[Associated Press; By BETSY BLANEY]

Associated Press writer David Mercer in Champaign, Ill., and Christopher Leonard in St. Louis contributed to this report.

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