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n. Illinois | We will not witness an exact repeat of the 1980's just as the 1980's were not a repeat of the 1930's but the next downturn will rhyme.
Everyone talks as if every operation in the 1980's was on the brink. It was not that way at all. It was minority of operations that ran into trouble. Many operations did not go under nor were they even close too. Just as today there were many that operated without any debt. Also much of the land was held without debt but it was the landlord and not the operator who was in such a position so please ignore all of those who state x% of the land is debt free. Yes its a true statement but its also irrelevant unless you expect that landlord to let you operate their farm without paying rent. Ignore those who are claiming the banks/Farm Credit won't let you get in too deep, they will and they are as we speak allowing people to get in too deep. There is only one person that can keep that from happening and its you and nobody else.
No one knows when it will happen. Its not a question of if, its a question of when and why. History tells us the why is falling income (relative to historical) and major change in credit conditions. In the 1980s it was the massive increase in interest rates which the operator's had 100% of the risk. Today much of the interest rate risk has been assumed by the lenders via fixed interest rates (in the1970- 1980's Farm Credit via the Federal Land Bank did not offer anything but a variable rate nor did Production Credit associations) Banks didn't offer any fixed rate longer than 5 years (and they still don't for the most part). If I had to speculate the next credit crunch is going to be caused by a liquidity crunch that affects the creditors who find themselves with too much fixed rate loans in a rapidly increasing interest rate environment, the same circumstances that killed the savings and loans industry.
The yet to be fully implemented basel III banking regulations where banks will be forced to market to market their loan portfolio will/may also influence this. Agricultural production is a highly volatile industry where an operation can go from extreme profits in one year (2022) to a massive loss (2023) the next year. Banking regulators continue to push that the last result determines if your loan is a good loan or a bad loan without any regard to the nature of the industry.
I was brought up to view the results on a more holistic basis (taking the good years and the bad years over time to determine a true picture of repayment ability) but that isn't where the regulators are and its been a losing fight to get anyone to address this issue realistically.
So what happens when the bank has to market to market a loan that just got downgraded from a good rating to a bad rating because of a loss (outside of customers control) while at the same time having a loan that is priced under where the current market is. A massive market down will be required so the banker being responsible will want to hold less of such a volatile asset. Farm Credit will not be immune to the new basel III regs either.
So a quickly increasing interest market compounded with new banking regulations forcing mark to market on a loan portfolio creates massive write down of a loan portfolio value threatening the solvency of the lending institutions with the lending institutions pulling their funding from the industry that is the most volatile which is agricultural production financing, forcing a horrible down turn and massive liquidations as every leveraged operation is forced to sell out due to their inability to find financing. Do not ignore the stupidity of the people in charge. Ag is minor part of the whole financing/banking world and the folks making the rules could care less about how it affects Ag.
Lots of If's in all of the above many which may not happen. Basel III mark to market for loans is coming. Just as the mark to Market on a banks bond portfolio is causing issues today (the large bank failures in the spring of 2022 can be traced to holding too much low rate T-bills). the much lower returns in 2023 maybe they are a just a one time occurrence and the good returns (2020-2022) will return due to some unseen event.
Action steps :
keep Liquid. Liquidity is the one thing that every banker appreciates and understands. Keep your payments in line with a conservative estimate of your ability to generate repayment. If your operating rate is 75% and your family living and income taxes draw is 5% do not have payments that exceed 15% of your gross. (100-(75+5)=20) 20/15 =$1.33 for every $1 of payments.
Know what your operating rate is Know what your family living/taxes draw is.
If your banker doesn't hound your about liquidity find one that will.
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State of Ag Banking
