West Lafayette, Indiana
October 27, 2008
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:
- 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."
- 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.
- 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.
For more information about agricultural borrowing and
lending in today's tough economy, read Boehlje's papers:
- "The Financial
Crisis: Implications for Farm Borrowers" and
- "Financial Stress in Agriculture: Implications for
Lenders"
Both are posted on the Purdue
Extension Financial Crisis Information Web page, located at
http://www.agecon.purdue.edu/news/financial_crisis.asp |
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