Farms Start to Feel Credit Pinch

Cash Shortage Hits Once-Thriving Sector as Downturn Saps Rural Lenders By LAUREN ETTER The credit crunch is trickling down to the farm as agricultural lenders tighten credit standards, leaving some farmers short of money to feed their animals or put in crops as the planting season nears its end. Deepening slumps in the livestock, dairy and ethanol industries have contributed to mounting troubles for rural lenders. That is making it harder for some growers to borrow money they need to buy seed, fertilizer, equipment and animal feed. Associated Press Direct loans outstanding made to farmers for operations by the Farm Service Agency have hit their highest level since the Farm Crisis of the 1980s. "It's tough," said Bruce Drinkman, a 46-year-old dairy farmer in Glenwood City, Wis., who recently had his credit line drastically reduced. "My whole lifetime of work could be destroyed." Borrowing is important to farmers this time of year as they try to finish up planting before it's too late -- generally by mid-June, depending on the region. Fertilizer and other costs remain high; farm-production expenses this year are expected to make up 79% of gross farm income, an increase from last year, the Agriculture Department said. Lending woes are an about-face for the agriculture sector, which has remained a relative bright spot in the economy. Over the past two years, high grain prices and rising global demand for food and the biofuel ethanol lifted farmers' profits and helped rural businesses and banks. Debt-to-asset ratios for farmers are still at all-time lows. "A year ago, when I went around the country, ag bankers were saying, 'I don't have anything on my credit-watch list,' " said economist Michael Swanson of Wells Fargo, one of the nation's largest agriculture lenders. Rural lenders tended to be more conservative in their lending and were less exposed to the subprime-housing debacle and other Wall Street tumult. But in recent months they have had to confront spreading troubles in the dairy, poultry, hog and ethanol businesses. The Federal Reserve Bank of Kansas City said Friday that "turbulent agricultural and macroeconomic conditions" are contributing to "tightened agricultural credit conditions" in its seven-state region. The Minneapolis Fed said much the same in an assessment of its six-state region last month. The Kansas City Fed said a record percentage of agriculture lenders surveyed in the first quarter reported raising their collateral requirements, a key indicator of credit standards. The same group of respondents reported the lowest farm-income and capital-spending levels in six years, a sign that farmers are tightening their belts. Last week, Agriculture Secretary Tom Vilsack visited Brush, Colo., and was greeted by hundreds of farmers demanding financial assistance in the wake of the April 10 failure of New Frontier Bank in nearby Greeley. That failure alone "has shocked our system," said Gary Teague, a Fort Morgan, Colo., corn farmer, cattle rancher and feedlot operator who banked at New Frontier and is now scrambling to find a new lender. Mr. Drinkman, the Wisconsin dairy farmer, and his wife opted to cash out her individual retirement account to buy corn seed and meet other dairy-related expenses when they couldn't find a lender willing to replace the credit pulled back by Independence State Bank. "It's not fair to us to basically pull the rug out from under us," Mr. Drinkman said. Dennis Meyer, president and chief executive of Independence Bank of Independence, Wis., said he couldn't comment on individual customers, but that his bank considers each prospective borrower's cash-flow projections and ability to service debt. "If it isn't there, it's really not right for the lender to say, 'We have enough collateral, and we'll just keep going with you,' " Mr. Meyer said. He cited the 1980s farm crisis, when a combination of excessive debt and high interest rates produced a wave of foreclosures and farmer suicides. "I'd rather have somebody upset with me and lose their business than to sell them out and go through those types of things again," Mr. Meyer said. Loan applications at the federally backed Farm Service Agency, a lender of last resort, have surged to a 20-year high as farmers seek help after being turned away by traditional lenders. As of April 30, the agency had made about $728 million of direct operating loans for the fiscal year ending Sept. 30, up nearly 70% from a year earlier. The Farm Credit System, a federally chartered network of five banks and 90 borrower-owned associations, reported a nearly 20% decline in its first-quarter 2009 combined net income. Net income at AgStar Financial Services, an agricultural and rural lender based in Mankato, Minn., dropped 56% in the first quarter of 2009, while its provisions for loan and lease losses soared to $16.9 million, up from $713,000 the previous year. Rodney W. Hebrink, AgStar's chief financial officer, said strong performance at the bank over the past few years meant a contraction was foreseeable. "When you start at the best you've ever been, there's only one place to go," he said. Mr. Hebrink said the bank hasn't tightened its lending standards. Douglas R. Stark, president and chief executive at Farm Credit Services of America, based in Omaha, said that while he thinks the agriculture economy is still "relatively strong," he is seeing more farm customers who require some sort of loan restructuring. Mr. Stark's bank saw a 41% drop in net income for its first quarter and a $29.5 million provision for loan losses, up from $583,000 the year prior. "Certainly, we would look at new requests for credit with a much more critical eye," he said. Write to Lauren Etter at lauren.etter@wsj.com