You would have to be a recluse not to be aware of the huge financial challenges awaiting the U.S. in the next few months. While everyone has been discussing the impact of Wall Street on Main Street, let’s go beyond that to the farm gate.
First, many of you deal with community banks, the Farm Credit System, FSA and other financial institutions. Is your money safe and will they continue to loan money?
Many of the lenders involved in this crisis were shadow bankers, who are apart from the mainstream regulated lenders that must play by the rules. However, some banks have invested in financial instruments or made loans in areas facing a major correction of asset values. These institutions may face challenges.
Expect more paperwork and documentation to be required. Government unfortunately will attempt to step up oversight on all institutions, possibly under one regulation. Many of these oversight agencies may not have an understanding of agriculture and rural areas. Producers must make their lender better by providing the financial statements and detail necessary to tell the story to the oversight agencies.
Credit will become more scrutinized and possibly much more conservative – you had better know your five Cs of credit. Liquidity, cash and financial sensitivity testing will be very important in developing salable financial packages.
For producers in the grain enterprise who experienced red-hot markets and strong profits, watch for 2009 and 2010 margin compression because of increasing input costs. Another barometer to measure upcoming economic health will be the economic health of the Asian economies. Growth must be near 10% to maintain strong food and fuel demand.
The final word is that Wall Street will ripple to the far corners of the globe and to farm and rural communities. A proactive plan is your best remedy, but that may not stave off some economic damage.
Editor’s note: Dave Kohl, Corn & Soybean Digest trends editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups. He can be reached at sullylab@vt.edu.