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Financial turmoil puts squeeze on farm credit
MISSISSIPPI STATE -- With banks in financial trouble and the stock market still dropping, farmers preparing to secure financing for next year's crops should expect an uphill battle.
David Schweikhardt, a professor of domestic policy and international trade issues in the Department of Agricultural, Food and Resource Economics at Michigan State University, said producers are paying off their production loans in the fall and will get new ones in the spring.
“People are being lulled into a sense of false confidence,” Schweikhardt said. “We hear a lot of discussion that agriculture is not going to be impacted by the economic downturn because we haven't seen it so far. I think that has to do with the timing more than anything else.”
Schweikhardt was on campus in November discussing this subject at the Mississippi Agricultural Economics Association annual meeting.
He said high commodity prices and good yields in recent years cause many people to assume the ag sector's balance sheets will be positive and producers will have no trouble borrowing the money they need for seed, fertilizer and equipment. However, Schweikhardt said even borrowers with good credit scores and history with a bank may have trouble getting loans.
“Lenders will be facing requirements that borrowers offer higher collateral before they are given a loan, and banks themselves are being forced to have better ratios of assets to debts,” Schweikhardt said.
In response, banks will raise their lending standards and demand more information than they did previously when making new loans, he said.
“For the same amount of money they might have borrowed last year, producers will have to put up more collateral and provide more evidence that they'll be able to pay back that money,” Schweikhardt said. “Lenders will be asking people more questions about the profitability of their operations and their ability to repay loans under worst-case scenarios.”
John Anderson, agricultural economist with the Mississippi State University Extension Service, said Mississippi producers typically go to the bank in late in November or December to apply for loans for the next year's growing season.
“Be prepared with a plan when you go to the bank,” Anderson said. “Have all your financial statements up-to-date and in order, and have as specific a plan as possible to demonstrate how the loan will be repaid and what your cash flow will look like in timing and amounts.”
Farmers have been good credit risks and their balance sheets have continued to improve since the mid-1980s, when the agricultural sector had significant financial problems. Anderson recommended farmers prioritize expenses, carefully consider all purchases, and make only those needed to improve efficiency and keep the operation viable.
“We're in recession now and at this point, all indications are that it will get worse,” Anderson said. “We may have to go back 20 to 30 years to see a recession as bad as the one we're going to see.”