Economists: Credit will tighten for farmers

Published 12:24 am Tuesday, December 2, 2008

The nation’s credit crunch had little effect on farmers this year, but economists say that will change when planters attempt to secure loans next year.

Farmers are usually good credit risks for banks and their balance sheets have continued to improve since the mid-1980s when the agricultural sector had significant financial problems.

David Schweikhardt, a professor of domestic policy and international trade issues in the Department of Agricultural, Food and Resource Economics at Michigan State University, says even farmers with good credit scores and history with a bank may have trouble getting loans in 2009.

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“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.”

Most farmers had already received loans to buy the seed, fertilizer and equipment they needed because the credit markets were at the time not frozen by an economy in recession.

Schweikhardt said high commodity prices and good yields in recent years has also caused many people to assume the agricultural sector’s balance sheets will be positive and producers will have no trouble borrowing the money next year.

Those assumptions are wrong, Schweikhardt said, because banks will raise their lending standards and demand more information than they did previously when making new loans.

“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.

Anderson recommended farmers prioritize expenses, carefully consider all purchases, and make only those needed to improve efficiency and keep the operation viable.

“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.”