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Rural ripple: Financial crisis likely to impact agricultural lending

FARGO, N.D. -- The Wall Street crisis may have impacts on farm lending, but perhaps a more apparent and immediate impact may be on U.S. farm policy and the support structures.

David Kragnes, a Felton, Minn., farmer and a board member for CoBank, a $65 billion Farm Credit System lender based in Denver, says the Farm Credit System is in a strong position to take care of farmers' needs, but that doesn't mean times won't be challenging.

Kragnes thinks the most immediate "in-your-face" impact could be on federal budget cuts in farm programs and agricultural research. He says the Standard & Poors downgrading is an indication that the government has "kicked the can down the road" and hasn't answered "burning questions about what sort of government we can afford and what we are willing to pay for as we go."

This sentiment is echoed by Ryan Larsen, a North Dakota State University assistant professor in agricultural economics who specializes in farm finance issues. He says one lender he talked to recently said the potential changes in interest rates could hurt, but "what keeps us up awake at night is thinking about these (federal budget) cuts and how this going to affect our farmers."

Farmers probably don't have any easier a time sorting through the smoke and mirrors of bond ratings and their impact on inflation and world economics than anyone else. The Federal Reserve Board's indications it will hold down interest rates for an extended period will have some kind of impact.

The Farm Credit System is different than the banks in that it must make loans to any farmer who qualifies for its loans, while the banks can lend to whomever they want. There is a lot of competition in the ag loan market in this region. The Farm Credit System is a "government-sponsored enterprise" and borrows money from the same federal sources such as the Federal Home Loan Mortgage Corp. ("Freddie Mac") and the Federal National Mortgage Association ("Fannie Mae"). They don't borrow money competitively, but get it at a government rate.

Lenders say there are differences between now and the 1980s, when farmers went through a serious credit crisis that triggered foreclosures and national policies on debt write-downs.

Today, lenders say the majority of the land changing hands is being paid for in cash, either by farmers or sometimes investors, whose money can't earn interest in certificates of deposit and other investments. Land that is under mortgage is more likely to be on fixed rates vs. variable rates, reducing the volatility that farmers must deal with. A 30-year amortized loan might be adjusted every five years, but the lenders protect themselves in the market.

Larsen says that perhaps half of the farmland in North Dakota may have debt owed on it, but he knows of no good statistics on that. Most new land deals involve 30 to 35 percent down payments, and then stretch the purchase out, commonly over 30 years.

"I know a lot of the big push in the past few years has been to get away from variable interest, and to fixed rates," Larsen says. "There have been a lot doing refinances into fixed mortgages -- a huge chunk." He says Farm Service Agency officials have told him some of these loans are at very low interest rates.

Larsen thinks that operating loans, renewed each year, will see the biggest impact from interest rate changes. He says recent years in agriculture have been profitable, and he thinks extension service ag advisers have hoped farmers may have used some of this profit to set aside funds for a rainy day.

"In these times of bounty, people have been investing in machinery and land quite heavily," Larsen says. "If they've expanded because of the positive outlook, you hope they haven't put themselves in a risky situation."

That said, Larsen acknowledges it hasn't been clear just where to park money for a rainy day.

"It's tough to find a good investment, period."

Stan Herren, an economics professor at North Dakota State University, says something everyone in agriculture has to be aware of is that there's going to be more volatility.

"With all of this uncertainty that goes around, investors are moving their money around very quickly. I think we've seen that in the stock markets," he says.

Mikkel Pates writes for the Grand Forks, N.D.-based Agweek, which is owned by Forum Communications Co.