“There are two kinds of economist making forecasts these days, those who don’t know and those who don’t know they don’t know,” Andy Lowrey says jokingly.
Lowrey who is president of AgFirst Farm Credit Bank in Columbia, S.C., says the potential financial problems facing farmers in the Southeast are no joking matter, but farming in general is in much better financial shape than most U.S. industries.
The rapidly declining financial markets globally have left economists in uncharted waters when it comes to figuring out what to do, Lowrey says. “If you are not confused by now, you’re not paying attention,” he quips.
Most of the financial problems in the agriculture sector are tied to home lending and can be laid at the feet of the U.S. Congress, Lowrey says.
“Fannie Mae set out to increase home ownership in the U.S. from about 60 percent to over 90 percent. In the background, Congress was involved urging higher home ownership. When home lending got an AAA rating, banks and pension funds got involved.
“Everybody thought home prices could not drop by 20 percent, but they did — and more in many areas of the country. They should have taken a look at farmland prices — in 1980 farmland prices climbed and everyone was saying land prices would never go back to 1970’s levels. By 1987, farm land prices were well below 1980 levels.
“In 2007, U.S. banks wrote off $2 billion in home loans and sold remaining home loans to companies like Lehman Brothers for 90 cents on the dollar. Clearly that didn’t work out so well for Lehman Brothers nor several other financial giants that are now out of business.
“At the same time home prices were dropping, Americans were taking equity out of their homes in record numbers. In 2006, Americans took about $6 billion out of home equity. In 2007, we took $60 billion and would have taken that much out in 2008 had it been available,” according to Lowrey.
“The only way for banks, including some that make farm loans, to get their balance sheet back in order is to quit lending. Americans owe more than a trillion dollars more than we can pay back. We have to reduce spending and get the economy back on track to have any kind of long-term financial stability,” Lowrey says.
Agriculture is in the eye of this financial hurricane, the South Carolina banker says. At the end of 2008, short-term investments are there for agriculture. Long-term investments for agriculture or virtually any other area of industry are just hard to come by, he says.
“Fortunately agriculture is in a stronger financial position tha other sectors of U.S. industry, but we cannot dodge all the financial bullets created by problems in housing and other segments of the financial industry,” he adds.
The Farm Credit System was created in 1916 to give rural America better access to credit. Now, the organization is split into 12 regions and is owned by more than 400,000 farmers.
The Farm Credit System is in great financial shape compared to other banking institutions. Short-term there is plenty of money. Long-term the outlook is not so bright, Lowrey says.
“We used to have multiple financial institutions bidding for our business. Now, we are lucky to have three or four we can depend on,” he says.
“Commercial banks, because of all the financial questions worldwide, are more reluctant to make farm loans, so more farmers are coming to Farm Credit banks. Most of our farmers are taking heed of financial uncertainties and are making moves to reduce long-term risks.”
Financial failures in agriculture have been magnified in these difficult times and financial successes have been diluted by the general downswing in the economy. For example, the bankruptcy of large ethanol production plants tends to make wary long-term investors even more skeptical of investing in agriculture. Not much can be done with a failed ethanol plant — other than look at it, the financial expert quips.
“Going into 2009, short-term financing for a crop in the Southeast is still realistic for most farmers. Most of our customers who needed $250,000 to finance a crop 2-3 years ago now need $350-000-$400,000 for the same size operation.
“Long-term, buying a farm or making multiple equipment purchases, as farmers move from one crop to another, will be increasingly difficult,” Lowrey contends.
“I visited with 20 farmers recently and all agreed they are going to put off making input purchases, especially fertilizer until the last minute. If this happens on a big scale, supply problems will be a big issue. Sometimes wait-and-see may be wise, but not healthy,” Lowrey stresses.
“The current recession is likely to be long and protracted, but not very deep. It is likely to persist most of 2009. Going into 2010, I think the economic recovery will be slow, but steady,” Lowrey says.
“Consolidation of financial regulators is likely to happen in the future. This is not good for agriculture because most bank regulators know little or nothing about the business cycles that drive agriculture,” he adds.
Speaking at a recent agricultural meeting Lowrey said in closing, “Of all the dire things I’ve said about our economy and our financial situation, by far the most frightening is that, going into 2009, the financial universe is in Washington D.C.”