The Big Picture by JT Korkow: Can personal finance fill the void?
February 3, 2015
(Part 1 of 2)
In the past few years I have noted a void in available agricultural financing that has eliminated some potentially good operators from becoming owners of land and livestock. Since the economic disaster of the 1980s I wrote about previously, lenders have had to become more proactive managing their credit risks to avoid future losses of depositor money, thus requiring higher cash down payments and devaluing the proposed collateral to "liquidation" value for loan making purposes. While agricultural commodities have turned a notable profit over the past several years, there still seems to be reluctance by many lenders to take on more risk, especially with beginning farmers. As with any other business that has experienced success, ag banks are flush, and bankers are paid extremely well for managing their gold plated credits, so why would they need to work any harder in pursuing credits with more risk? As a result, the big operators are encouraged to get bigger. An example of this mentality was a comment I heard from one of my banking connections after they had an annual board meeting. He said the board had decided to not pursue any more new loans, but that they would just raise the interest rates on the good loans they already had to increase the bank's bottom line. So goes the power of booking variable rate loans!
From the 1930s through the 1990s, the USDA Farmer's Home Administration (FmHA) was established to provide supervised credit for beginning farmers and ranchers, with the goal of "graduating" those borrowers to a local lender once they were financially established. The county supervisor that administered the loan program for FmHA was required to have a background in production agriculture and was trained in the financial aspects of the job. I mentioned this particular requirement for becoming a county supervisor to establish its significance. The government in elect at that time understood it could not effectively teach production agriculture to a banker, but could train a farmer/rancher to prepare a budget and balance sheet!
Unfortunately, with the combining of the old Farmers Home Administration and the Agricultural Stabilization and Conservation Service (ASCS) in the mid 1990s to the now existing Farm Service Agency, the loan programs were diminished under the leadership of the Commodity Credit Corporation (CCC) and the shadow of entitlement programs. Although the loan programs still exist, funding for the programs are not a priority, and many of the personnel administering the programs lack the production agriculture experience that enabled them to effectively "supervise" borrowers involved with production agriculture. The government answer to this dilemma was to enhance and push the loan guarantee program, thus requiring another lender to make the loan, then FSA would guarantee up to and in some cases, over 90 percent of the loan against loss, much like Federal Housing Administration has done with home mortgages, or Small Business Administration does with business loans. The obvious problem with all of this is the lack of direction for someone new wanting to get into production agriculture. I say this because most of the ag bankers I know today would rather spend their spare time at the clubhouse than tromp around in the cowpies or get a little grain dust on them.
Proverbs 22:7 The rich rule over the poor, and the borrower is servant to the lender.