Ag Money Matters

Report Calls Farm Economy Solid

2009-08-17T08:46:00.002-05:00

OMAHA-(World-Herald)--The nation's farm economy "remained solid" in the second quarter of this year, a report from Federal Reserve economist Jason Henderson of Omaha said Friday, with expected strong income this year from corn and soybeans.

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Farm Expenditures: How Do You Compare With The Averages?

2009-08-11T07:58:00.000-05:00

URBANA, Ill.-(UIUC)--You and your neighbors have all said at some time or another that the 2009 crop was the most expensive you every planted. The cost of fertilizer probably ensured that fact and seed corn prices had a lot of input as well. Certainly 2009 production costs were above that of the two prior years, but after the big jump up in 2007, production cost for 2008 did not rise as rapidly, aiding profitability. USDA has just calculated your 2008 production costs, and while high, the upward trend slowed a bit.

Farm production expenses were $307 billion in 2008, up 8.3% from 2007, but 2007 farm production expenses were up more than 19% compared to the prior year. The USDA survey indicated that higher machinery costs lead the way for 2008 expenses, both in the tractor & combine category that was up 32.6% and in the “other machinery” category that was up 34.1%. However, output for machinery and vehicles was only 7% of total farm outlays.

The major category was chemicals, fertilizer, and seed, which was 16% of the outlays, and totaled more than $49 billion. Feed expenses were next highest at nearly $47 billion. While fuel expense was only 5.2% of total outlay, USDA economists delved into the $16 billion that farmers paid for energy. Diesel fuel was nearly 62% of that, with gasoline at nearly 19%, LP gas at 13%, and other fuels about 7%. The average fuel cost per farm approached $8,000.

Over the course of 2006 to 2008, all categories of expense climbed incrementally, except for the outlay for livestock and poultry. Livestock producers paid more for feeder calves and feeder pigs in 2007 than they did in 2008. Specifically the 2007 total was $33 billion, compared to only $28.3 billion in 2008. Notable is the fact that interest expenses held steady from 2007 to 2008.

Over the five year period from 2004 to 2008, total farm production costs have risen from just under $212 billion to just over $307 billion. The cost of feed is the largest expense, rising from $29.7 billion in 2004 to $46.9 billion in 2008. The next highest category, farm services, includes all crop custom work, veterinary custom services, transportation costs, marketing charges, insurance, leasing of machinery and equipment, general and miscellaneous business expenses, and utilities. Farmers saw those costs rise from $26.8 billion in 2004 to $38 billion in 2008. For 2008, labor expenses of $29.7 billion slipped ahead of fertilizer at $22.5 billion. However, as a percentage of the totals both farm services and labor fell slightly.

For crop farms, which reported an average of $175,141 in total expenses, the farm services bill consumed $23,000, fertilizer consumed $20,000, the cash rent bill was nearly $20,000, and labor was more than $21,000, all for 2008. The seed bill last year was over $14,000 and the chemical bill was just under $11,000.

For livestock farms in 2008, which averaged $113,390 in average expenditure, the feed bill was just under $35,000, the cost of feeder stock was just over $20,000, and farm services was nearly $13,000.

Across the Cornbelt the average expenditure per farm was $145,555 with feed outlay at $17,558, cash rent at $16,919, farm services at $14,621, and fertilizer at $14,525. Interestingly, Cornbelt farmers spent nearly $7,500 on new machinery in 2007, versus nearly $10,700 in 2008.

Summary:

There is no surprise that farm expenses have risen in every category except for interest payments. However, the surprising fact about USDA’s survey of farm outlays is the deceleration of the increase from 2007 to 2008. Following the 19% increase in expenses from 2006 to 2007, the rate climbed only 8% more in 2008. The report on 2009 expenses will not be issued until August of 2010. While fertilizer and seed costs rose expectedly in 2008, the largest jumps were in the costs that farmers had to pay for farm machinery.

(Source: Stu Ellis, University of Illinois.)

Farm Values Post First Decline Since 1987

2009-08-05T08:14:00.002-05:00

WASHINGTON-(Drovers)--USDA's Agricultural Land Values and Cash Rents Annual Summary, released August 4, shows U.S. farm property losing some value over the past year, after more than two decades of steady gains.

Farm real estate values, a measurement of the value of all land and buildings on farms, averaged $2,100 per acre on January 1, 2009, down 3.2 percent from 2008. The 3.2 percent decrease from 2008 is the first decline in farm real estate value since 1987, according to the report.

Regional changes in the average value of farm real estate ranged from virtually no change in the Northern and Southern Plains regions to an 11 percent decline in the Mountain region. The highest farm real estate values remained in the Northeast region at $4,830 per acre. The Mountain region had the lowest farm real estate value, $922 per acre.

Both cropland and pasture values are down from the previous year. Cropland values declined by $110 per acre (3.9 percent) to $2,650 per acre.

In the Cornbelt region, the average cropland value decreased 4.0 percent from the previous year, to $3,870 per acre. However, in the Northern Plains and Delta regions, cropland values rose 1.6 percent and 0.6 percent, respectively.

Pasture value declined by $20 per acre (1.8 percent) from 2008 to $1,070 per acre. The Mountain region had the largest percentage decrease in pasture value, 16 percent below 2008.

The report notes that contraction in the overall economy has caused less commercial and residential development in many regions. Livestock and crop commodity prices have declined from a year earlier, thus producers and investors are less optimistic than a year ago. A decrease in the demand for recreational land has also contributed to the overall decrease in land values.

The full report is available from the USDA's National Agricultural Statistics Service.

(Source: Drovers.com)

Farm Credit Getting Tighter as Bad Loans Grow, Regulator Says

2009-06-19T08:50:00.001-05:00

WASHINGTON-(Bloomberg)--The cost of credit in rural areas is rising as lenders become more cautious in extending loans to farmers, according to Leland Strom, the chief executive officer the U.S. Farm Credit Administration.

Nonperforming loans grew by almost $500 million to $3 billion in the first quarter, indicating a need to lend more conservatively, Strom said today at a congressional hearing in Washington. Still, the U.S. Farm Credit System remains well- capitalized, with a 7.9 percent increase in net income to $2.9 billion last year, Strom said.

The lending environment "will be more challenging than the system has faced in many years," Strom said. The FCA is an independent agency that regulates the banks and other entities of the Farm Credit System, the largest agricultural lender in the U.S.

Agricultural producers have so far fared better than other parts of the U.S. economy during the global financial crunch, which has cost banks and businesses worldwide more than $1.47 trillion in writedowns and credit losses. Debt loads for agricultural producers are the lowest in at least 50 years, according to government data.

Low leverage levels have helped farmers withstand declines in wheat, corn and soybean prices, according to Bob Stallman, president of the American Farm Bureau Federation. The commodities were all down at least 23 percent from last year's records, as of yesterday.

Today's hearing was held by the House Agriculture subcommittee overseeing farm lending. Also scheduled to testify was Michael Gerber, president and chief executive officer of the Federal Agricultural Mortgage Corp. Farmer Mac, as the government-sponsored company is known, helps U.S. farmers obtain long-term financing.

AUDIO: Ag Banks Hold Strong, Still Feel Financial Pressures

2009-06-01T09:52:00.002-05:00

Agricultural Credit Standards Tighten

2009-05-14T08:05:00.007-05:00

OMAHA-(Federal Reserve)--Agricultural borrowers are increasingly concerned about access to credit. Amid economic weakness and a financial crisis, commercial banks have tightened credit standards for various types of loans. While agricultural borrowers may be concerned about credit availability, agricultural lenders are equally concerned about the creditworthiness of agricultural borrowers as the farm economy weakens.

As the financial crisis deepened, agricultural banks outperformed other commercial banks - but they still saw their profits decline. Despite questions regarding credit availability, commercial banks are extending credit to agricultural borrowers at lower interest rates. The soft erosion in agricultural loan quality, however, has led agricultural lenders to tighten credit standards and shift more financial risk to borrowers.

Solid, but falling profits at agricultural banks

Based on Agricultural Finance Databook information, the financial performance of agricultural banks weakened in 2008.¹ The Federal Reserve defines agricultural banks as commercial banks with agricultural loans accounting for more than 14 percent of their loan portfolio.² According to the Federal Reserve, the average return on assets and equity at agricultural banks steadily declined in 2008. By September 2008, the return on equity at agricultural banks declined to 7.6 percent, and the rate of return to assets edged down to 0.8 percent (Chart 1).

Several factors contributed to the dip in agricultural bank profits. First, interest rates on agricultural loans have declined, trimming gross revenue on loan activity. According to agricultural credit surveys from the Federal Reserve, interest rates on all types of agricultural loans have dropped significantly below 2006 levels.⁴ The average interest rate on operating loans dropped from more than 9.0 percent in 2006 to 7.0 percent in the fourth quarter of 2008. During the same time, the average rate on farm real estate loans fell from roughly 8.5 percent to 6.75 percent.

A rise in the cost of capital also squeezed bank profits. One measure of the cost of funds is the London Inter-Bank Offered Rate (LIBOR), the rate banks pay to borrow funds from other banks in the London money market and a benchmark for other short-term interest rates. In September, the financial crisis fueled a spike in LIBOR, which raised the cost of funds for banks. The spread between the interest rate paid to acquire funds (LIBOR) and the interest rate earned on agricultural loans narrowed, suggesting lower profit margins (Chart 2). In the fourth quarter, the spread widened as LIBOR fell sharply, suggesting some improvement in bank profitability.

However, loan delinquencies have edged up, trimming agricultural loan profitability. In 2008, delinquency rates on agricultural loans climbed steadily from 1.08 percent in the first quarter to 1.23 percent in the third quarter (Chart 3).⁵ At the same time, net charge-offs on agricultural loans rose from 0.12 to 0.19 percent. Delinquency rates and net charge-offs on agricultural loans rose faster in the largest 100 U.S. banks. In fact, at smaller commercial banks, delinquency rates on agricultural loans actually declined.

Impact on agricultural lending

Despite their relatively strong performance, agricultural banks tightened lending standards to preserve capital and manage the risk arising from the economic downturn. Agricultural banks continue to originate agricultural loans at relatively low interest rates. However, banks are increasing collateral requirements and shrinking loan maturity as agricultural loan quality deteriorates.

Agricultural banks, in general, report ample funds available for operating loans.

For example, according to the agricultural credit survey of the Federal Reserve Bank of Kansas City, 70 percent of bankers reported the amount of funds available for farm operating loans in the fourth quarter of 2008 was unchanged from the year before, with an additional 14 percent having more funds available. And these banks expected to have roughly the same amount of funds available in the first quarter of 2009. Moreover, only 4 percent of the bankers reported refusing a loan due to a shortage of funds, the same percent as in 2007.

Nevertheless, agricultural bankers responding to the Kansas City Fed’s agricultural credit survey reported raising collateral requirements on operating loans.⁶ In the fourth quarter of 2008, the collateral requirements index rose almost 20 percent above year-ago levels (Chart 4).⁷

Other Federal Reserve data indicate that farm real estate accounted for roughly 17 percent of the collateral used for the nation’s farm operating loans in the fourth quarter of 2008, up modestly from previous years. The use of farm real estate as collateral was more prevalent in larger operating loans. Moreover, small and mid-sized banks tended to use farm real estate as collateral more often than larger banks.⁸

The increase in collateral requirements does not appear to have severely restricted loan activity in the agricultural sector. In fact, farm debt levels rose through 2008. By the third quarter of 2008, farm debt held at commercial banks was 8.2 percent above year-ago levels, with real estate debt up 10 percent and non-real estate debt up 6.3 percent. The volume of non-real estate loans rose sharply in the fourth quarter, with increases to both the crop and livestock sectors.

While banks still made loans, they adjusted loan terms in response to the increased risk associated with farm lending. The average risk rating on agricultural loans edged up in 2008, and bankers continued to report deteriorating loan quality as livestock profits were elusive and margins declined for the crop sector.⁹

And carry-over debt appears to be rising, as more agricultural bankers reported an increase in operating loan renewals and extensions in the fourth quarter. In response to higher risk, banks reduced the length of operating loans. For example, after steadily rising since 2001, loan maturity on agricultural loans dropped 20 percent, to 12 months, in the fourth quarter of 2008. Simply put, as agricultural risk increased, banks were more reluctant to extend loans for longer periods of time.

Risks to agricultural lending in 2009

The recession poses many risks to agricultural lending in 2009. In terms of supply, the further deepening of the financial crisis could limit funds for agricultural loans. At the same time, a weaker farm economy could erode the creditworthiness of agricultural borrowers when loan needs are most pressing.

A primary risk to agricultural lending is the availability of funds. Banks can raise funds from a variety of sources - equity and debt markets, deposits, and nontraditional sources such as Federal Home Loan Banks. A deeper financial crisis could threaten a bank’s ability to raise funds from nondepository sources.

For example, some large agricultural lenders have struggled to raise debt capital by issuing commercial paper. After peaking in November 2007, the volume of commercial paper issued by domestic financial institutions had dropped roughly 15 percent by the fourth quarter of 2008. Moreover, equity values of larger banking institutions have fallen, which also limits their ability to raise capital.

Bank deposits are a major source of loanable funds for agricultural banks. The risk is that lower interest rates on CDs and other savings vehicles could slow bank deposit growth, limiting funds available for agricultural loans. Through the third quarter of 2008, domestic deposits at agricultural banks remained above 2007 levels, according to the FDIC. Still, rising job losses from the recession pose a risk to deposit growth because people could lose their income stream and tap savings for household needs. In turn, fewer deposits could limit funds for agricultural loans.

Despite these risks, smaller agricultural banks have access to federal government and Federal Reserve funds. In response to higher risk, agricultural bankers indicate they are increasing their use of guarantees from the U.S. Department of Agriculture’s Farm Service Agency. Moreover, small agricultural banks have access to primary and secondary credit funds through the Federal Reserve’s discount window and have the ability to request funds for seasonal credit, especially during the planting and harvest seasons, when funding needs are more significant.¹⁰

Another pressing concern is the creditworthiness of agricultural borrowers. In 2009, profit margins for crop producers are expected to narrow, and profitability for livestock producers is expected to remain elusive (Henderson and Akers). While loan defaults remain low, delinquency rates, charge-offs, and risk ratings are rising, and continued deterioration in the agricultural economy could further erode the creditworthiness of agricultural borrowers. Further weakness in agricultural loan quality could lead to additional tightening of lending standards and an increase in loan denials for agriculture.

Also, the expected decline in agricultural income has contributed to softer farmland values. Agricultural credit surveys from the Federal Reserve indicate that farmland values edged down in the fourth quarter of 2008. Farmland is a major source of collateral for agricultural loans, especially for smaller agricultural banks. The decline in farmland values could shrink the amount of collateral available for agricultural loans.

In sum, the financial crisis and resulting recession have dimmed economic prospects for the agricultural economy and trimmed profits at agricultural banks. Still, agricultural banks have performed much better than other commercial banks and appear to have funds available for agricultural loans. However, a steeper downturn in the agricultural economy could erode the creditworthiness of borrowers and further tighten credit standards on agricultural loans. With the combination of weaker profits at financial institutions and rising risk on agricultural loans, agricultural borrowers are being asked to accept more of the financial risk emerging from a volatile agricultural environment.

(Source: Jason Henderson, Vice President and Omaha Branch Executive, Federal Reserve Bank of Kansas City.)

Direct Effects Of The Economic Crisis On U.S. Agriculture

2009-04-02T08:39:00.000-05:00

WASHINGTON-(USDA)--The economic crisis will have direct and indirect effects on U.S. agriculture. The direct effects will come from changes within the U.S. economy. The indirect effects will stem from the impacts of the crisis on foreign income, trade, and world energy prices.

The direct effect of the crisis on U.S. agriculture is expected to be modest. On the demand side, the crisis is likely to lower U.S. GDP (Global Insight (2009) projects a decline of 2.7 percent in 2009), and thereby consumer spending on food. This demand effect, though, will probably be small. MostU.S. consumers have a sufficiently high standard of living that demand for food is not very sensitive to changes in income.9 Consumers are less likely to eat out at restaurants, and an increasing share may choose to shop for food at warehouse outlets. Total consumer expenditures on food (including food away from home) will fall, but the amount of food actually consumed will not. This will likely result in a changing composition of demand for agricultural commodities and products and, thereby, a fall in some agricultural prices.

For example, demand may shift from more expensive beef and fish to less expensive meats, such as poultry. Consumers may also reduce purchases of "organic" foods in favor of more "industrial" foods.

On the supply side, the disruption of overall U.S. financial markets could inhibit lending to farmers and agribusinesses. Agribusinesses heavily dependent on credit could be constrained, which, in turn, could lower demand for agricultural inputs. In recent years, farm borrowing has increased from large regional banks, some of which have moved toward riskier lending behavior (FDIC, 2008). Yet, most rural banks that lend to farmers are not closely tied to the financial world that created, and is now suffering from, the financial crisis. Agricultural borrowers and lenders tend to have secure long-term relationships, which should mitigate the crisis’s effect on the flow of loans to farmers.ects of the Economic Crisis on U.S. Agriculture

Rabobank To Acquire $354 Million Portfolio From Farmer Mac

2009-03-31T08:09:00.002-05:00

On Monday, Rabobank announced the purchase of a $354 million portfolio of agricultural loans from the Federal Agricultural Mortgage Corporation (Farmer Mac). The acquisition was conducted by two of Rabobank Group's U.S. subsidiaries: Rabo AgriFinance, the U.S. agricultural finance arm, and Rabobank, N.A., the California community bank.

"Rabobank's purchase of this portfolio from Farmer Mac is a clear demonstration of our continued commitment to invest in American agriculture and expand our business," says John Ryan, President and CEO for Rabo AgriFinance. "As a part of the Rabobank Group, we have the resources and flexibility to complete this acquisition, while providing Farmer Mac with added liquidity. This transaction further advances our mission to be a premier agricultural lender in America."

The portfolio purchased by Rabobank includes approximately 1,000 agricultural loans of various sizes and terms, originated by many different lenders, including Rabobank. The borrowers operate in all major sectors of agriculture and are located throughout the entire United States.

"We're excited about this opportunity to continue building our agriculture client base in California, especially amongst medium and small sized farmers," says Aitor Ezcurra, Chief Commercial Officer and head of agricultural banking for Rabobank N.A.

(Source: Rabo AgriFinance.)

Farmer Mac Reports Fourth-Quarter Net Loss Of $61.1 Million

2009-03-18T07:59:00.003-05:00

WASHINGTON-(PR Newswire)--The Federal Agricultural Mortgage Corporation yesterday reported a fourth quarter net loss of $61.1 million, or $6.03 per diluted common share for the three months ended December 31, 2008, and a full year 2008 net loss to common stockholders of $154.1 million or $15.40 per diluted common share.

These results primarily reflected fourth quarter losses on financial derivatives and provisions for losses principally related to certain of its credits in the ethanol sector and the previously announced third quarter losses on certain investments.

Consistent with Farmer Mac's focus on capital compliance, the board of directors reduced the common stock dividend to $0.05 per share from its previous level of $0.10 per share. The common stock dividend will be payable on April 3, 2009 to stockholders of record on March 24, 2009.

"The unprecedented turmoil in the capital markets and the sharp downturn in the national economy have been significant factors in causing the second half of 2008 to be the most difficult in Farmer Mac's history," said Michael A. Gerber, Farmer Mac's newly appointed President and Chief Executive Officer. "In response, we have begun taking actions intended to mitigate the impact of these conditions going forward. We have concluded a review of Farmer Mac's investment portfolio operations and taken actions to address the difficult market dynamics that have emerged and seem likely to prevail in the time ahead. We have adjusted our funding strategies to reduce the reliance on financial derivatives that have adversely affected our capital position, notwithstanding that all of our derivatives have been economically effective.

"Despite the difficult second half of 2008, Farmer Mac has continued to have access to the debt markets to fund its program assets. We raised $124.2 million in capital through preferred stock offerings at the end of the third quarter and during the fourth quarter, ensuring compliance with regulatory capital requirements. As we look ahead to Farmer Mac responding to the credit needs of rural America in 2009 and beyond, capital strength will continue to be important. Within this context, the Corporation's Board of Directors decided to reduce the quarterly common stock dividend from 10 cents per share to 5 cents per share."

Loans underlying the Corporation's guarantees and commitments grew to a record $10.1 billion at year end and, with the exception of ethanol loans, continued to perform well during 2008. Delinquencies on non-ethanol loans have remained near historically low levels consistent with the strength of the U.S. agricultural economy through the end of the year. Farmer Mac's 90day delinquencies, including ethanol loans, were $67.1 million, representing 1.35 percent of the portfolio, as of December 31, 2008.

Excluding the ethanol loans, 90-day delinquencies were $17.9 million, or 0.36 percent of the portfolio. The fourth quarter provisions for losses of $17.2 million were largely due to the bankruptcy of one ethanol producer and construction issues related to another ethanol plant. The ethanol industry has suffered due to the volatility of commodity prices. While those prices have stabilized, the industry still faces significant challenges.

"Farmer Mac's outlook for 2009 is mixed," Gerber continued. "We expect the turmoil in the financial markets will continue to create challenges to Farmer Mac's ability to raise capital and securitize its assets. While agriculture has been strong, the industry is not insulated from the effects of the economic downturn. Some sectors continue to prosper, while others, such as ethanol producers, dairy farmers and the protein sector (e.g., cattle, poultry and pork producers) are experiencing pressure on profitability. In addition, significant portions of California and Texas are facing the effects of persistent drought. Farmer Mac continues to closely monitor developments in those industries and areas experiencing stress. We anticipate stress in the portfolio is likely to increase in 2009, although any resultant credit issues are expected to remain within manageable levels.

"Looking ahead, there should be a growing need for financial vehicles to expand credit availability to those agricultural industries that have sound financial fundamentals due to the broader trends underway now, such as the de-leveraging of capital. These trends will likely have the effect of reducing credit availability from traditional lenders to the agricultural sector. This presents opportunities that Farmer Mac is actively pursuing.

"There will also be opportunities for loan growth in the rural utilities segment, a new area for Farmer Mac as a result of the legislative expansion of its charter in May 2008. Farmer Mac expects to continue the growth it experienced in this sector during 2008 in providing financing to rural utilities lenders. Farmer Mac expects that demand for rural utilities loans will be robust, particularly as the industry adds significant new capacity for the first time since the 1970s. Furthermore, additional power transmission lines will need to be constructed as the development of wind and solar power plants increase the demand for means to transfer power from the source of clean power generation to the ultimate consumer. Farmer Mac's ability to participate in the growth of the rural utilities portion of its business will be limited by Farmer Mac's limits on borrower exposures and its overall risk tolerance. Public policy shifts in the energy sector may also alter Farmer Mac's opportunities in this area, as electrical power generated by and for rural electric cooperatives tends to be biased toward coal as a fuel."

Farmer Mac is a stockholder-owned instrumentality of the United States chartered by Congress to establish a secondary market for agricultural real estate and rural housing mortgage loans and rural utilities loans and to facilitate capital market funding for USDA-guaranteed farm program and rural development loans. Farmer Mac's Class C non-voting and Class A voting common stocks are listed on the New York Stock Exchange under the symbols AGM and AGM.A, respectively.

Solid, But Falling Profits At Agricultural Banks

2009-03-04T08:15:00.004-06:00

The U.S. financial crisis has trimmed the profitability of agricultural banks and other commercial banks. However, agricultural banks performed much better than their banking peers. The strongest performance emerged from smaller agricultural banks.

Based on Agricultural Finance Databook information, the financial performance of agricultural banks weakened in 2008.1 The Federal Reserve defines agricultural banks as commercial banks with agricultural loans accounting for more than 14 percent of their loan portfolio.2 According to the Federal Reserve, the average return on assets and equity at agricultural banks steadily declined in 2008. By September 2008, the return on equity at agricultural banks declined to 7.6 percent, and the rate of return to assets edged down to 0.8 percent (Chart 1).

Agricultural bank returns, however, were much stronger than returns at other commercial banks. By September 2008, returns for all commercial banks had plummeted more than 70 percent, with the return on equity dropping to 2.86 percent and return on assets falling to 0.28 percent.3 Agricultural banks also had much stronger performance than other similarly sized small commercial banks, those with less than $500 million in assets. The return on equity and assets at smaller banks was 2.4 and 0.3 percent, respectively, well below the returns at agricultural banks.

Several factors contributed to the dip in agricultural bank profits. First, interest rates on agricultural loans have declined, trimming gross revenue on loan activity. According to agricultural credit surveys from the Federal Reserve, interest rates on all types of agricultural loans have dropped significantly below 2006 levels.4 The average interest rate on operating loans dropped from more than 9.0 percent in 2006 to 7.0 percent in the fourth quarter of 2008. During the same time, the average rate on farm real estate loans fell from roughly 8.5 percent to 6.75 percent.

A rise in the cost of capital also squeezed bank profits. One measure of the cost of funds is the London Inter-Bank Offered Rate (LIBOR), the rate banks pay to borrow funds from other banks in the London money market and a benchmark for other short-term interest rates. In September, the financial crisis fueled a spike in LIBOR, which raised the cost of funds for banks. The spread between the interest rate paid to acquire funds (LIBOR) and the interest rate earned on agricultural loans narrowed, suggesting lower profit margins (Chart 2). In the fourth quarter, the spread widened as LIBOR fell sharply, suggesting some improvement in bank profitability.

However, loan delinquencies have edged up, trimming agricultural loan profitability. In 2008, delinquency rates on agricultural loans climbed steadily from 1.08 percent in the first quarter to 1.23 percent in the third quarter (Chart 3).5 At the same time, net charge-offs on agricultural loans rose from 0.12 to 0.19 percent. Delinquency rates and net charge-offs on agricultural loans rose faster in the largest 100 U.S. banks. In fact, at smaller commercial banks, delinquency rates on agricultural loans actually declined.

Delinquency rates and net charge-offs on agricultural loans remain well below other types of loans and help explain the relative strength of agricultural bank profitability. For example, the delinquency rate on all types of loans and leases was 3.65 percent in the third quarter of 2008, almost triple the rate on agricultural loans. Net charge-offs were 1.46 percent, more than seven times the size of net charge-offs on agricultural loans.

(Source: Kansas City Federal Reserve, Jason Henderson, Vice President and Omaha Branch Executive.)

VIDEO: U.S. Bankers Challenged To Reform System Quickly

2009-02-12T08:44:00.000-06:00

VIDEO: New Year, New Economy?

2009-01-06T15:58:00.002-06:00

Will the U.S. economy get worse before it gets better? Watch this video and draw your own conclusion.

Watch CBS Videos Online

Take Steps to Limit Your Liability As Tax Time Nears

2008-12-31T08:51:00.003-06:00

It's almost tax time again and who couldn't use a few ideas to make that task easier? While tax scenarios and needs are uniquely personal, there are some tactics that are worth considering. Here are some year-end tax planning strategies that could help limit your tax liability.

Before 2008 comes to a close, consider these tips:

* Prepay farm expenses. Feed, fertilizer, seed and similar expenses can be prepaid. Typically, discounts are received by paying for these expenses in the fall. You can deduct prepaid expenses that do not exceed 50 percent of your other deductible farm expenses.

* Pay taxes or interest. Paying taxes or interest can be done before the end of the year to increase 2008 expenses.

* Defer income to 2009. Crop and livestock sales can be deferred until the next year by using a deferred-payment contract. Most grain elevators or sales barns will defer sales until the next tax year. Producers should be aware that they are at risk if the business becomes insolvent before the check is received and cashed.

* Purchase machinery or equipment. Machinery or equipment purchases can be made before the end of the year to get a depreciation or 179 expense deduction in 2008.

Information on other agricultural-based tax topics can be found in the Farmers Tax Guide, publication 225. You can get one from any Internal Revenue Services office or you can call (800) 829-3676. Any questions about these topics should be addressed to your tax professional or the IRS at (800) 829-1040 or www.irs.gov.

(Source: Pork Magazine)

Bankers Survey Suggests Rural Credit Problems Persist

2008-12-22T08:18:00.002-06:00

OMAHA, Neb.-(AP)--National economic problems, export declines and a weaker farm sector are being blamed by rural bankers for problems showing up in 11 Midwest and Plains states.

The problems are reflected in the December report on a monthly survey of the bank executives.

The survey's Rural Mainstreet Index rose slightly this month to 25.0 from November's record low of 22.1. A year ago, the index stood at 54.3, well above growth-neutral.

Creighton University economist Ernie Goss and Bill McQuillan, CEO of City National Bank in Greeley, Neb., created the survey, which is conducted in 11 states: Colorado, Illinois, Iowa, Kansas, Minnesota, Missouri, Montana, Nebraska, North Dakota, South Dakota and Wyoming.

"As agricultural commodity prices have tumbled, farmland price growth has now moved into negative territory for a second straight month," Goss said in a Thursday news release about the survey. "After peaking at 81.0 in January of 2008, the index declined to 37.1, a record low, from November's 45.2.

"The stronger dollar, lower agricultural commodity prices and elevated farm input costs have likewise caused farmers to delay purchases of farm equipment," he said.

The survey's confidence index, which reflects expectations for the economy six months from now, remained in its trough for a fourth straight month. The December figure was 15.6, compared with November's record low of 13.0.

Said Kathy Thuman, president of Farmers State Bank in Maywood, Neb.: "Everyone is concerned about the precipitous drop in grain prices."

An index on new hires rose slightly to a feeble 25.8 this month, from November's record low of 23.6.

Goss said the hiring index has been below growth-neutral for 12 months in a row, "due in part to a national economy that is negatively affecting growth for Rural Mainstreet."

In a brief referendum on the national economic recovery efforts, most of the bankers who responded to the survey (87.3 percent) favored aid to U.S. automakers.

But many of them echoed the sentiments of John Nelsen, president of First Tier Bank in Holdrege, Neb.

"Reorganization under bankruptcy laws may fit the auto industry," he said. "It appears to me that labor contracts could be revisited and approved by the bankruptcy court, as well as all aspects of their financial problems. Then, and only then, would I support a government-backed cash injection."

An index on home sales showed even more weakness. The December figure was a record low of 15.9, compared with 20.6 in November and 29.0 in October.

The bankers' loan volume index dropped to 44.7 from November's 46.4.

Almost 200 communities are represented in the survey. The average community population is about 1,300.

Farmer Mac Raises $50 Million Of New Capital

2008-12-17T09:39:00.005-06:00

WASHINGTON - (Cattle Network) -- The Federal Agricultural Mortgage Corporation today announced that it has further strengthened its regulatory capital position by raising $50 million of new capital. This was accomplished yesterday through the issuance of $85 million of new preferred stock and the retirement of $35 million of existing preferred stock.

Since September 30, 2008, Farmer Mac has raised net new capital of $115 million. These capital raises both strengthen Farmer Mac's regulatory capital position and position Farmer Mac to increase its business volume, consistent with attractive growth prospects in its core markets-the agricultural and rural utilities sectors.

Michael A. Gerber, Farmer Mac's Acting Chief Executive Officer, stated, "Over the past three months, Farmer Mac has maintained ongoing access to the credit markets and we are confident about Farmer Mac's business prospects. Our core business continues to be solid, and we are encouraged by the increased business opportunities that exist in the agricultural and rural utilities markets.

"This capital raise, the availability of the Series C preferred stock, and other strategic and operational initiatives that are underway are designed to position Farmer Mac to take advantage of these opportunities. We are pleased that the investors in our preferred stock have shown confidence in Farmer Mac's future."

Of the $85 million of new preferred stock, $70 million was Series B-3 preferred stock issued to a large institutional investor. The Series B-3 preferred stock is callable on a quarterly basis beginning September 30, 2009 and initially will pay a 10% annual dividend that will increase in 2% steps on January 1st of 2010, 2011, and 2012. Concurrently, Farmer Mac repurchased from this investor and retired $35 million of the Corporation's 6.40% Cumulative Preferred Stock, Series A, which was issued in May 2002.

The remaining $15 million of new preferred stock was Series B-1 preferred stock issued to the National Rural Utilities Cooperative Finance Corporation ("National Rural"). The Series B-1 preferred stock is callable on a quarterly basis beginning June 30, 2009 and also will pay an initial 10% annual dividend that will increase in 2% steps on October 1st of 2009, 2010, and 2011. This issuance was a reopening of, and addition to, the Series B-1 preferred stock issued on September 30, 2008.

Farmer Mac also announced that it has agreed to guarantee and purchase up to $500 million of secured debt to be issued by National Rural, with such debt to be secured by eligible loans to National Rural borrowers. To support Farmer Mac's regulatory capital requirements on such new business, National Rural will invest an amount equal to 4% of any outstanding debt under this facility in new Farmer Mac Series C preferred stock. The Series C preferred stock initially will pay a 5% annual dividend. That rate will increase in 2% steps on the fifth and tenth January 1st following its issuance, and will be callable at any time. Farmer Mac has not yet issued any Series C preferred stock.

Farmer Mac believes that this agreement with National Rural has the potential to serve as a model for additional guarantee and purchase transactions with commercial banks and Farm Credit institutions. This model will enable Farmer Mac to raise additional capital to support its mission of providing liquidity and lending capacity to agricultural and rural utilities lenders.

Farmer Mac also reported that each member of its Board of Directors has voluntarily forfeited the stock appreciation rights they were granted in June 2008. This action results in reduced compensation expense of approximately $883,000 over two years, and an increase in capital.

Based on a number of factors, including all of the actions described above, Farmer Mac's Board of Directors determined that continuing the quarterly dividend at the $0.10 per share rate on Farmer Mac's common stock is appropriate, and declared a quarterly dividend in that amount on Farmer Mac's Class A, Class B and Class C common stocks. The dividends are payable on December 31, 2008 to holders of record of common stock as of December 22, 2008.

The Board of Directors also declared quarterly dividends on Farmer Mac's Senior Cumulative Perpetual Preferred Stock, Series B-1 and Series B-2. The quarterly dividends of $25.00 per share of preferred stock are for the period from September 30, 2008 through December 31, 2008 and are payable on December 31, 2008 to holders of record as of December 15, 2008.

Farmer Mac is a stockholder-owned instrumentality of the United States chartered by Congress to establish a secondary market for agricultural real estate and rural housing mortgage loans and rural utilities loans and to facilitate capital market funding for USDA-guaranteed farm program and rural development loans. Farmer Mac's Class C non-voting and Class A voting common stocks are listed on the New York Stock Exchange under the symbols AGM and AGM.A, respectively.

Farmers Can Get Credit, But Other Challenges Remain

2008-12-08T08:18:00.002-06:00

WASHINGTON-(Farm Progress)--According to the Farm Credit Council money is available for farmers to obtain credit for spring planting. While most farmers will be able to get loans this spring, according to Darin Ihnen, a South Dakota farmer and vice president of the National Corn Growers Association, tight credit and other economic factors may come back to haunt them.

"We thought we were immune but you know with the global economy and everything so intertwined it really is going to come back to us I'm afraid," Ihnen says. "There are so many other things that are starting to come into play now with credit not being available for the ethanol industry - that's going to affect our markets. It's a lot bigger picture than just getting loans for the farms. You know we've got farmers that have sold grain that may not get those contracts honored and grain elevators that sold grain to some ethanol plants that those might not get honored, so we could have a domino effect."

At first it was rising input prices, and then it was falling commodity prices. Ihnen says though some input costs have come down others haven't and it just seems like the challenges keep coming.

"Land costs are not going to come down. It seem like once rents go up or the cost of land goes up it doesn't matter what the commodity price is, they just don't come back down," Ihnen says. "It's going to be challenging to try to balance out and try to lock in some profits. It's going to force us once again to become better marketers on how we market our grains."

Financial Turmoil Puts Squeeze on Farm Credit

2008-12-01T08:40:00.001-06:00

STARKVILLE, Miss.-(MSU Extension)--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."

Farmer Mac: Money For Farms, Where Is It?

2008-11-26T08:57:00.003-06:00

Farmer Mac: Money For Farms, Where Is It?

Over the last several months, the economic situation in the United States has been steadily declining. However, while the economy may be suffering, money is still accessible for farmers and agricultural industries. In a recent primetime address concerning the state of the economy, George W. Bush claimed, "if you own a business or a farm you would find it harder or more expensive to get credit." While it may be harder for Americans to borrow money for commercial and residential purposes, agricultural lending remains strong and interest rates are near historic lows.

The recent economic crisis has dramatically weakened many sectors of the American economy. One sector that continues to show strength, however, is agriculture. With a high demand for many types of commodities, agricultural real estate prices show increasing performance, with some areas producing double digit appreciation year after year. Given this remarkable agricultural strength, many financial institutions will make it a point to lend their money for farm and ranch purposes.

Subprime mortgages are largely to blame for the current economic crisis. Financial institutions that have invested in these dangerous loans have suffered heavy losses, losses that have depleted the capital available to loan to ordinary Americans. Many of the banks that risked money in subprime loans have been purchased by larger companies or, even worse, have filed for bankruptcy protection. For those of you unfamiliar with subprime mortgages, they are generally loans made to a borrower with a weaker credit profile than that of a prime borrower. Although there is no standardized definition, in the US subprime loans are usually classified as those where the borrower has a credit score below a certain level, below a score of 660. Because of this weaker profile, subprime borrowers have a higher likelihood of default than prime borrowers do. Subprime mortgages were securitized and sold on the secondary market to investors like Lehman Brothers, Bear Stearns, Washington Mutual, and IndyMac Bank, to name a few. The difficulties of many of these large scale banks and financial institutions are well known, but now even smaller community banks across the country are feeling the economic pinch; banks such as Superior Bank of Hinsdale, Illinois, Main Street Bank of Northville, Michigan and Mutual Bank of Park City, Utah.

In wake of the market turmoil many banks have rewritten underwriting guidelines and, in some cases, have frozen lending capital until America’s markets stabilize. Farmer Mac, on the other hand, is making positive, proactive moves during this recession. Charted in 1988, Farmer Mac (Federal Agricultural Mortgage Corporation) was created to provide relief to farmers in a time of double-digit interest rates. This government program guarantees the loan portion a financial institution would otherwise assume 100% risk of. A loan Institution that utilizes Farmer Mac’s guarantee program will have the ability to offer low interest rates and fixed terms to their customers. This enables the farmer or rancher to cut loan costs and increase the bottom line, ultimately ensuring that many agriculturalists will not see the effects of the "credit freeze." Because of the financial strength and stability of Farmer Mac and the program’s persistence in product development, many financial institutions whose lending practices focused on farm and ranch operations have been fortunate enough to survive a tidal wave of bank closures and losses. One can only speculate what the future will hold, but many economists believe the agricultural community will continue its path of perseverance.

On August 11, 2008, Farmer Mac announced that core earnings for the quarter ending June 30, 2008, had increased 28% over the comparable quarter in 2007. Furthermore, they announced a record guarantee portfolio of $9.8 billion. In addition to this information, Farmer Mac’s president, Henry D. Edelman, stated, "We are pleased with our continued strong performance, as evidenced by our second quarter core earnings. To date, the credit issues that have arisen in the housing and consumer sectors of the economy have not affected the agricultural economy in general or Farmer Mac’s guarantee portfolio in particular." Historically low default rates were also quoted at just .11 percent. With continued growth, record loan volume, solid leadership and record low default rates you can rest assured Farmer Mac will be here today and tomorrow to help financial institutions provide outstanding loan products to their customers, the farmers.

How To Get a Farmer Mac Loan:

Farmer Mac loans are secured by agricultural real estate. Farmers and ranchers can obtain one of these loans by requesting a loan through a Farmer Mac lender. You may use a Farmer Mac loan for refinance purposes or to purchase agricultural property. To learn more call Josh Mitchey at 866-929-5585 or email him at josh@farmplusfinancial.com. www.FarmPlusFinancial.com

Written by: Josh Mitchey, Business Development Manager, Farm Plus Financial.

Edited by: Justin Ellison, Dept. of History, University of Indiana

Sources:

http://www.fdic.gov/bank/individual/failed/banklist.html

http://www.whitehouse.gov/news/releases/2008/09/20080924-10.html

http://www.farmermac.com/company/profile/profile.aspx

Farming Fundamentals Strong Despite Increasing Risks

2008-11-21T15:10:00.000-06:00

Sam Miller, Chairman of the American Bankers Association Agricultural and Rural Bankers Committee, says farmers should have no problems acquiring production loans for 2009 as long as their lenders are comfortable with their capital positions. Joe Cornely expains.

Video: The Credit Crunch Worsens

2008-11-20T08:07:00.000-06:00

Watch CBS Videos Online

Farm Credit Available, More Strings Attached

2008-11-19T14:47:00.000-06:00

WEST LAFAYETTE, Ind.-(Purdue)--A global economic slowdown isn't likely to hit agriculture as hard as other industry sectors, but that doesn't mean farmers and their lenders won't see changes ahead, said Michael Boehlje, a Purdue University agricultural economist.

While Boehlje said he believes credit will be available for crop and livestock producers, farmers and ranchers might have to jump through more hoops to borrow money. Banks, on the other hand, could require more information and documentation from borrowers.

"At a minimum, producers are going to have to do a better job of showing their lender what kind of profitability they've had and what kind of income they're generating," Boehlje said. "Secondly, it's quite possible that the lender is going to be asking for more detail on the inventory side of a producer's balance sheet. They might ask, 'Have you got some of your products priced with futures or forward pricing contracts for next year? Have you got some of your production costs locked in for next year, and how much?'

"Producers might end up with more projection work. Whether they'll have to do a full-blown cash flow projection isn't certain. But they certainly are going to at least have to give some additional evidence than they've given in the past of the cash that's going to be generated by their operation next year."

Lenders also could increase their oversight of borrowers, Boehlje said. That might come in the form of more frequent farm visits and monitoring of checking and deposit account balances and spending.

Producers could discover lenders aren't willing to loan them as much money as they ask for, especially if the loan is for purchasing machinery or land.

"We're probably going to see capital expenditure loans are a little more difficult to obtain this next year than they might have been otherwise," Boehlje said. "I suspect lenders are going to be asking more questions about land purchases. Particularly, what kinds of financing will be needed to buy land.

"My sense is we already have seen some indication that lenders are being more conservative in their financing of land purchases. They are worried about the land prices. They might not be willing to finance 80 percent of the land purchase. They may only want to finance 50 or 60 percent of the land purchase. So if a producer wants to make that purchase, they're probably going to have to come up with more cash out of their own pocket."

Other farm credit issues the agricultural industry could face in the months to come include:

n Less aggressive lending. "When there's a lot of uncertainty and increased risk in the markets, lenders turn conservative and are less likely to take on new customers," Boehlje said. "It's probably wise to stick with your current lender and not shop around for a better interest rate."

n Increased restrictions or covenants at loan signing. Lenders might, for instance, require borrowers to have crop insurance or insist on prior approval for capital purchases, Boehlje said.

n Modestly higher interest rates. "Since we don't see the same kind of risk in the agricultural sector that we see in other industries, we don't expect to see dramatic rises in interest rates to reflect those increased risk premiums," Boehlje said.

Producers could be in for one unexpected shock: higher taxes.

"A lot of farmers report their income on a Schedule F tax return, and they are able to use the rules of the Schedule F to lower their tax burden by delaying sales and prepaying expenses," Boehlje said. "What that does is pull their taxable income down. This year, particularly for those who have cash flow problems and find themselves needing to liquidate some assets or sell some of their inventory, that could mean an increase in their taxable income. It's a technical issue, but the tax basis for all raised grain and livestock is zero, so every dollar of sale of that inventory is ordinary taxable income."

Agriculture remains a strong industry and credit risk, Boehlje said. Producers who practice sound money management and accounting should weather the economic storm, he said.