A Farm Debt Crisis?

by George Putnam, president and CEO, Yankee Farm Credit

Agricultural commodity prices are sky-high. As I write this, corn prices are over $6 per bushel and wheat prices are more than $8 per bushel. Such prices were unheard of as recently as one year ago.

The feature article in this issue of Financial Partner magazine discusses this phenomenon. As noted in the article, many factors cause increased commodity prices, including the use of farm products for both energy and food, increasing demand from
developing countries, such as China and India, and the weakening U.S. dollar.

Midwest crop farmers are responding to high prices for their products by increasing production. Many are incurring additional
debt to buy land or equipment. Operating debt is increasing
to finance high input costs. Farmers’ cooperatives need more
working capital as their inventories and receivables become more valuable.

As a result, the Farm Credit System (FCS) has seen significant loan growth. Total FCS loan volume grew by 16 percent in both 2006 and 2007 and by another 7 percent in the first quarter of 2008. (Results for the second quarter of 2008 are not available as of this writing.)   

Many will remember when the Farm Credit System experienced significant growth in the 1970s and early 1980s. That period ended badly in the farm debt crisis of the mid 1980s. Many farmers went bankrupt, and some lenders, too.

Healthy FCS institutions, including the predecessors of Yankee Farm Credit, were required to make payments to support failing institutions. Even so, the Farm Credit System survived only because Congress provided temporary financial assistance, which the System fully repaid by 2005.

Could a farm debt crisis happen again? Perhaps. But several aspects of the Farm Credit System are different today.

• First, the Farm Credit Administration is a stronger
  regulator. If System institutions get into trouble, it is
  likely that FCA will act more quickly and vigorously
  than it did in the 1980s.
• Second, the Farm Credit System Insurance Fund
  was established as a result of the System’s difficulties
  in the 1980s. This fund, which insures holders of the System’s bonds, totals $2.6 billion, about 1.7 percent of outstanding bonds.
• Third, the Farm Credit System’s loan quality is much better than in the 1980s. The ratio of high risk loans to total loans is a good measure of loan quality. This ratio was 14 percent in 1985 and peaked at a whopping 26 percent in 1986. For reference, we consider 2 percent or less as
  the standard for this ratio. This ratio was 0.4 percent at year-end 2007 and 0.5 percent at the close of the first quarter 2008. Both are excellent numbers.

Nevertheless, it’s good to be cautious. Credit quality can deteriorate quickly, and with little warning. And the System’s capital position is being tested by the recent growth in loan volume.

Your association is healthy. Yankee Farm Credit has not seen the growth that the Midwest has seen. Loan volume grew by 2 percent in 2007 and actually fell in the first quarter of 2008. Loan quality is excellent, with only 0.3 percent high risk loans. Capital remains strong.

At Yankee Farm Credit, we are proud to be able to meet the credit needs of agriculture in our territory, as we, and our predecessor associations, have for more than 92 years.

This letter appeared in the Fall 2008 issue of Financial Partner (F.P.) magazine, Yankee Farm Credit's customer publication. Click here if you would like to start receiving F.P. magazine in the mail.

Read the rest of the issue which includes:

• Meet your new director
• Director election results
• Crop insurance
• Young Entrepreneur Profile - Lo-Nan Farms, LLC, dairy and cash crops
• Washington Update - Congressional attention given to commodity and food prices
• Ag Enhancement Grant Recipients Announced - Grants to promote Northeast agriculture total $38,000

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