It's a buyer's market for money. That may not seem to be the case, coming on the heals of Federal Reserve Board interest rate hikes of more than 2% in the past 17 quarters. But stiff competition among lenders has reduced the spread between what they pay for money and what they charge producers.
“There's a lot of competition. Banks are charging farmers 130 basis points or 1.3% less than they usually do,” says Michael Swanson, ag economist for Wells Fargo, citing Federal Reserve Bank of Chicago data. The cost of funds has gone up, but banks have not passed all those costs through, Swanson says.
The reason for heightened competition is at least fourfold, sources say:
Netherlands-based Rabobank has gone from making no farm loans to becoming a top farm lender in just three years; Bank of the West has moved east to seek farm customers; and other lenders want to boost their ag portfolios.
Overall, the agricultural economy has been strong for several years running.
Lenders must share fewer farmers as the industry continues to consolidate.
Strong land values have spiked in recent years, giving bankers confidence that farmers have the collateral to back up loans.
There may be one more important reason, in the view of Elizabeth Hund, the head of U.S. Bank's food and agriculture division: “As the technology bubble burst, bankers started looking at industries more stable, though less sexy, such as agriculture.” The result, she says, “is that there is a lot of capital dedicated to this industry.” That means U.S. Bank, along with Wells Fargo, the Farm Credit System, Rabobank, community banks and other lenders, are aggressively seeking new customers. “It's good business,” Hund says. “Our ag portfolio is in good shape.”
Dennis Kelly, senior financial services team leader for AgStar Financial Services, Mankato, MN, says there “is a lot of competition” among lenders for good farm customers right now, not only among traditional lenders, but also seed companies and other suppliers that have become strong lenders in the past couple of years. More competition, he adds, “helps keep the rates down.”
Another piece of good news for farmers, Hund and others say, is that the Federal Reserve Board appears to have finished raising interest rates. “The Fed does not like to increase rates in election years,” Hund says. “The Fed likes to be stable.”
University of Illinois economist Paul Ellinger agrees that “credit availability has remained strong” due to competition among lenders. He also notes that there are some interest rate specials through the end of the year “regarding financing for 2007 pre-paids.”
Not all is roses in farm finance, however. According to the AgLetter published by the Federal Reserve Bank of Chicago, increases in the value of farmland slowed in the second quarter of 2006 and credit conditions drifted down from the conditions of a year earlier. Though smaller percentages of agricultural loans were classified as having major or severe repayment problems compared with the loans of six months ago, the rate of loan repayment fell from the second quarter of 2005.
Kelly notes, however, that the farm economy AgStar serves as part of the Farm Credit System in parts of Wisconsin and Minnesota “has strengthened locally due to good crops and strong prices.” He adds, though, that while there is plenty of capital available for farmers, they are thinking twice before making purchases, especially with short-term variable-rate loans that carry higher interest rates than was the case a year ago.
Competition among lenders also has encouraged them to offer new types of loans and other products, revamp existing products or find new ways of delivering them.
AgStar has several new loan programs, Kelly says. In August, the lender enhanced its Young or Beginning Farmer Program, making it “more robust” with an additional pool of money available and relaxing some of its credit standards.
AgStar also has introduced a revolving line of credit producers can take out on real estate loans that can be paid back over a period of time. The maximum amount on the revolving credit line is $100,000 and it can be used for any farm-related expenditure. AgStar also has begun offering grain loans. Kelly says that if farmers take their loan deficiency payments (LDPs) in the fall, which were $0.51/bu. last year, they no longer can keep their Farm Service Agency loan on the grain. Ag Star's new loan program allows a producer to take the LDPs and take out a grain loan, Kelly says.
John Deere Credit “offers a whole suite of finance products that can meet many of the key business needs of farmers,” such as installment loans and leases for equipment with a variety of repayment options “so we can best match a customer's cash flow,” says Jim Meenagh, manager of planning and corporate communications. One product is Farm Plan, which is a revolving credit product for inputs and other products sold through agribusinesses. John Deere Credit also offers seasonal financing sold through seed companies, conventional operating loans and crop insurance.
As far as the ag climate is concerned, Meenagh says that “we're obviously coming off a number of very good years in agriculture and many farmers are in good shape financially, which has made lending a little easier. This year is looking to be another good year in most parts of the country, and even though we're seeing some increases in delinquencies, we have not made any material change to our lending practices.” He adds, however, that some lenders have pulled back from farmers in drought areas and farmers who are not financially strong.
Rabobank's U.S. lending arm, Rabo AgriFinance, has introduced a new arrangement with AgriCredit Acceptance, Des Moines, IA, an affiliate company. The move will allow Rabo AgriFinance to enhance its one-stop shop offering for operating and real estate loans, as well as equipment and equity lines of credit, says Shawn Smeins, managing director for Rabo AgriFinance. The new arrangement will allow Rabo AgriFinance to “more aggressively market its wide range of financial products and adds more competition to the market and value for our clients,” Smeins says.
One of Rabobank's benefits for borrowers, Smeins says, is “that we have a food and agriculture research team that looks at trends and issues, publishing reports and consulting with clients — a benefit customers can draw from. We have a significant degree of flexibility for qualified borrowers.”
Smeins says that with increases in the prime rate, operating loans are now in the 7.5 to 8.25% range, with 10- to 15-year fixed-rate loans on real estate between 6.5 and 7%. The difference between the two rates is that variable rates are priced off the prime rate, while longer-term fixed rates are based off the bond market. Overall, Smeins says, “the industry is pretty stable. Our clients' balance sheets are in good shape.”
Several banks now offer a new system that enables farmers to scan checks so that they are immediately credited to their accounts, says Sam Miller, senior vice president of the M&I bank in Appleton, WI. M&I also offers a 10-year fixed-rate loan up to $250,000 based on the value of the farm home — similar to a home equity loan — that producers can use for any farm purpose.
Swanson of Wells Fargo says that, in addition to a variety of lending program options, his bank has been working to offer risk management tools. One is a program for grain and livestock in which producers can hedge their commodities but do not have to establish margin accounts.
U.S. Bank's goal is not only to be a full-service lender, but also to offer special programs, Hund says. One example, she says, is a program in which farmers can issue credit cards to their employees who drive trucks, so they can refuel them when needed.
All of these sources say that, despite tighter monetary policy designed to cut the supply of money and reduce inflation, when it comes to agriculture, the supply of credit is not only there, it has increased.