Production funds should be available, but expect to provide more documentation

By Vicky Boyd

Jim Wysocki says he remains optimistic that the current credit logjam will clear in time for lenders to grant production loans to growers later this winter.

“I do see signs that what the fed did on loosening credit is starting to help,” says Wysocki, who’s involved in a diversified operation in Bancroft, Wis., that has potatoes, processing vegetables, livestock silage and a dairy. “Had this happened in January or February, I think farmers would be in trouble by March.”

The chief financial officer of the family-owned Wysocki Produce Farm Inc. points to falling rates on the LIBOR—or London Inter Bank Offering Rate—index as a sign of a turn-around.

The LIBOR index reflects the rates that banks charge each other for short-term loans. Many lenders, including the regional bank with which Wysocki deals, use it as a basis for the variable interest rates charged on production loans.

Bankers typically consider production loans to be short term and a year or less in duration.

For a long time, the LIBOR index hovered around 2 percent. At the peak of the credit meltdown, it peaked at 4.5 percent. Beginning in about mid-October, it dropped to about 3.5 percent.

Nevertheless, Wysocki says he plans a conservative business plan for the 2009 season.

“If it turns out better, then I’ll increase my aggressiveness,” he says. “We can ramp up a lot faster than we can ramp down. I’d rather have the economic news through the course of this winter be better than I planned for than have it come out and be worse than I planned for.”

Wysocki says based on initial conver sations with his lender, he hopes to know by Dec. 1 whether he has financing for the 2009 season. By the end of January 2009, he wants to know the cost of that money.

Wysocki receives his short-term financing from a bank. Nationwide, banks account for about 42 percent of agricultural loans, says Jeff Greenlee, president of NBC Bank in Altus, Okla., and chairman of the American Bankers Association’s Ag and Rural Bankers Committee.

The Farm Credit System provides about 33 percent, while individuals and others account for about 17 percent.

Because of strong land values and commodity prices and low rates of ag-related loan delinquencies, most farmers should be able to get production loans for the coming season, says Michel Swanson, senior ag economist for Wells Fargo Bank in Minneapolis. But they will be scrutinized more.

“Is there still money to lend to ag and ag businesses? The answer is unequivocally yes,” Swanson told participants in a recent AgriMarketing magazine Webinar. “The problem is the price of the money has changed.”

Be prepared

Wysocki is taking the correct approach in developing a sound business plan, which includes accurate production costs, lenders say.

“It’s going to be real important, whether it’s an existing customer or a new customer, that they come in with good information and the bank understands the risk,” says Leonard Van Elderen, president and chief executive officer of Yosemite Farm Credit in Turlock, Calif. “They need to know their cost of production, and that has been an area that’s increased rapidly over the last two to three to four years.

“Input costs have increased dramatically, whether you’re in California growing trees or whether you’re in Iowa growing corn. Growers need to know all of their costs—debt service, interest, living costs, what do they need to come out of that pound or ton and what will it take to break even.”

In many areas of the West, lenders have grown concerned about water—not just availability but also the quantity and timing of deliveries, Van Elderen says.

Among the documents growers should bring in are a balance sheet, showing assets and liabilities, and statements showing accounts receivable and accounts payable.

In addition, lenders will look at historical income and expense statements as a way to evaluate the cost of production, Van Elderen says.

“Just because you hand your banker a tax return doesn’t mean that tells him what it costs you to produce a crop,” Van Elderen says.

Lenders also will ask for a business plan for the coming year that shows planted acreage intentions and a budget.

Although Farm Credit loan officers can’t predict actual crop prices for 2009, Van Elderen says they use a set of conservative figures to help estimate returns.

Danny Klinefelter, a Texas AgriLife Extension Service economist in College Station, encourages growers to start talking to lenders early to find out what type of documentation will be needed.

“There’s going to be a premium on having a business plan and your financial statements together,” he says. “Start talking to your banks or Farm Credit early because they’re going to be scrutinized more closely by the regulators.”

Do your homework

Klinefelter co-authored an Extension publication titled “Borrowing in a Risky Environment” that contains a set of 12 questions.

“If you went through and answered the questions and have the documentation to back up the answers, you should be in a much better position to approach a lender,” he says. “If you had the documentation and answered all of the questions, you actually would have done the financial piece of a business plan.”

And both Klinefelter and Van Elderen say growers should think twice about taking on more debt.

“I think based on what’s going on in the market that now is probably the time to very carefully consider a major capital purchase,” Van Elderen says. “I think maybe it’s a time to stay more liquid. We are not saying don’t replace equipment. It’s really about what you need to keep your operation going.”

Farm Credit—Fanny Mae and Freddie Mac’s solvent cousin

Like the financially plagued Fannie Mae and Freddie Mac, the Farm Credit System is a government-sponsored enterprise, says Danny Klinefelter, a Texas AgriLife Extension economist in College Station.

But the Farm Credit System differs from the others in that it is a borrow-owned cooperative that isn’t publicly traded and it can only make agricultural-related loans.

In addition, the Farm Credit System weathered the agricultural financial crisis during the early 1980s. As a result, several safeguards were put in place to ensure it wouldn’t happen again, Klinefelter says.

Farm Credit must follow strict criteria when making agricultural loans, and that is why the lender isn’t experiencing the fallout generated by the recent spate of subprime and other types of risky loans.

Based on current conditions, Farm Credit expects to have funds available for 2009 production loans, which are defined as short term lasting less than a year, says Doug Williams, managing director of the Farm Credit Funding Corp. in Jersey City, N.J.

“It will be pretty similar to what it’s been,” Williams says. “The price will go up, but nothing earth shattering.”

But if you’re making a capital purchase, longer-term loans—typically defined as two to 10 years—will be much more difficult to obtain, he says.

“That part of the marketplace—not just Farm Credit but the entire marketplace—isn’t functioning well at all,” Williams says. “They’re much harder to obtain and much more expensive.”