Local elevators are the focus of Iowa State University Economist Mike Duffy’s concern: “They had their books and balance sheets set up to carry $2.30-$2.50/bu. corn, not $7 corn; and their working capital got sucked up. Now we’re back in the $5 range and they have adjusted, but it will be a while until we see how this finishes out. I know of one elevator that wrestled with a $25 million margin call.

“Elevators may not have it as tough as some other small businesses, but I have noticed that my local elevator has not yet listed 2009 contracts,” Duffy says.
“The Federal Reserve Seventh District reported in spring of 2008 there were more funds available at 32% of its banks; where has that money gone? It is not totally clear to me. I do think ag is somewhat insulated from this subprime debacle, and it will take some time before things settle out. Here in Iowa, our land ownership survey reports that 75% of farmland is owned without debt.”

What has changed, Swanson explains, is that many banks held stock in Fannie Mae and Freddie Mac (The Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation), and when they went into receivership, that money disappeared. So those banks will require larger spreads (on the cost of funds) even if the Federal Reserve doesn’t raise its benchmark lending rate.”

But “community banks in the Midwest did not have as much involvement in this as the larger banks did,” explains Paul Ellinger, ag finance professor, University of Illinois. “At this stage, the Wall Street credit crunch still doesn’t affect the traditional corn and soybean farmer like it does corporate America because community banks are more deposit-based. The portfolios of agricultural banks in general have been very strong due to two years of high crop incomes.

“Of more concern to community banks is farmers’ breakeven levels,” he says.

There are two sides to how the Wall Street credit crunch will impact corn and soybean growers, as Michael Boehlje sees things. He is distinguished professor, ag economics, Purdue University. “We already have financial stress from price volatility, and we have just exacerbated that problem with this credit crunch.

“It may slightly raise the cost of funds for farmers and make lenders more conservative. Rural banks and the Farm Credit system have hardly participated in the subprime housing markets, so funds will be available, but at higher cost. But that would not impact growers as much as price volatility.

Farm balance sheets are very strong, according to USDA figures. “On average, farmers have 91% equity in their farms and only 9% debt; many have no debt at all,” Boehlje says. “And those averages includes livestock producers are having a very rough time.

“Farmers and their lenders learned from the 1980s, so they have already been more conservative. They have not tried to finance appreciating values like we saw in the housing market. That’s a very important difference, which means agriculture is much better positioned to weather this storm.

“Longer term,” Boehlje says, “if we do have a global economic slowdown, that could slow the global dietary transition from vegetable to animal proteins. But I don’t think that would reverse or permanently reduce animal protein consumption.

“I don’t want to conclude that we are facing a global recession or that a slowdown would be permanent. We might have a rougher patch for a time.”