Viewpoint
by Don Copenhaver
Keep focus on strong balance sheets
MFA increases credit reserves, strengthens its finance arm
The financial mess affecting U.S. and world markets illustrates the importance of conservative business practices. Chief in importance is a strong balance sheet. That holds whether you’re a farmer with sales under $100,000 or an Agricultural cooperative with sales exceeding a billion dollars.
As an immediate effect of the crisis, credit will be tight. More than most industries, agriculture relies on credit. There is little profitability in the downtimes of agriculture—for farmer, rancher or supplier.
Credit will cost more this year regardless of creditworthiness. Those with weak balance sheets will pay more to finance the additional risk.
Prior to the market’s meltdown, MFA renegotiated credit contracts. As was made abundantly clear by last year’s higher values in commodity prices, MFA’s credit needs surpassed traditional highs.
Obviously, it was in MFA’s long-term interest to increase credit reserves. As a result, we have a syndicated loan agreement with CoBank and roughly a dozen Farm Credit Services locations from around the country. Farm Credit has a capital market group for large accounts.
As it stands, MFA has a combination of long-term fixed and revolving credit exceeding $330 million.
MFA’s management sought out this arrangement because, as noted above, MFA did not have sufficient credit last year considering the tremendous run up in commodities. We do this year.
Amounts required last year won’t be necessary this year, if the decline in commodity prices holds (by no means a sure bet). All in agriculture need to prepare for volatility.
MFA’s credit arrangement should give us the capacity to accomplish anything needed whether in acquisitions, prepay for inputs, grain deposits or normal operating costs.
Another factor necessitating access to capital is that large companies with which we do business are accelerating cash-flow strategies. This arrangement should give us the flexibility to meet those needs.
In hindsight, we began seeking a credit arrangement at the right time. Following our talks with lenders, the subprime mess exploded. More and more economists are worrying the credit crunch will spill from the mortgage market into the loan market, and that includes agriculture.
A credit crunch is a reactionary movement to reduce the availability of loans (or credit). That can take the form of higher costs, tighter restrictions, more balance sheet scrutiny or a combination of the above.
An April 2008 Federal Reserve survey of loan officers showed an across-the-board tightening of credit standards. Keep in mind, that survey was taken in April, before the real extent of the crisis was known.
Most Midwestern banks aren’t part of the instability that is so afflicting the big city banks. However, the credit crunch will affect the lending habits of all banks.
A major difference between financially stable banks and unsound banks seems to be that banks that traditionally rely heavily on deposits are better able to weather crises than are banks that rely on capital-market financing.
As the head of MFA’s credit department told me, traditional farm banks in most cases are doing fine. Larger metro banks and chain banks will exit the ag market in the same fashion as happened in the 1980s.
When agriculture is an opportunity for additional income, he explained, these banks are happy to grab a piece. But they do not understand the complexities of agriculture. Right now, they want out.
The Fed’s April 08 survey provides evidence of that view: “Agricultural banks, in general, have fared better than other banks of comparable size. For ag banks, the rate of return to assets remains at the historical averages, despite average rate of return on equity edging down to its 2001 low. Return rates at agricultural banks were stronger than other small banks...”
Working capital remains an issue for all operations. Farmers need to put money against working capital. The rule of thumb is the 60/30/10 approach. Sixty percent should be directed to capital needs (pay down debt and grow the business), 30 percent to increase working capital and 10 percent to other needs.
Farmers need multiple sources of funds to finance their operations—supplier financing, Farm Credit Services, equipment financing, etc.
At MFA we have a viable source of financing called Agmo. There is no credit crisis at Agmo. It will continue to finance the amount of money farmers need to operate.
By definition, Agmo is a supply financer. MFA can finance what it sells. We have no plans to pull back on opportunity.
Agmo experienced large growth in the 1980s when the financing situation was similar. We expect growth today, and with our new agreements, we have the money in place to finance it.
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