Minding Ag's Business

Lessons from the 1980s

The recalibration of the grain economy is underway. It's not anywhere close to the 1980s debt crisis, but fathers who lived through that debacle don't want their children to be casualties, as Elizabeth Williams reports in her Senior Partners installment, "What Dad Learned in the '80s" (see the full story on the Farm Business page http://goo.gl/…). Nebraska grain producer and cattleman Don Cantrell learned you can be current on your payments, yet still be classified as a problem loan. He now avoids situations where multiple lenders "participate" on his credit lines, because he knows a loan committee in a distant city doesn't care as much about his credit as the loan officer at his local bank. He also tries to run with the minimum of operating credit.

Stan Reiss of Kansas drastically downsized his farming business when his machinery dealership was under stress, but he picked up a new successful new sideline in custom harvesting at a bargain price. He recognized that a business failure is nothing compared to the loss of a child, so developed a more balanced perspective on life.

By 1986, ag banks accounted for just under half of the 103 commercial banks that folded due to insolvency during the first three quarters of the year. The shock was that borrowers fared far worse than depositors. Janet and Rock Tregellas of the Texas panhandle now spread their credit around to several lenders, so they never have to deal with the FDIC again.

I was a young reporter in Washington D.C. who followed the debt crisis from the point of view of policymakers in the 1980s. What I learned from the Federal Reserve and the Farm Credit Administration at the time was that regulators took control when whole industries like ag or energy fell off the cliff. Once regulators discovered that a bank or Farm Credit portfolio included 25% or more problem loans, your loan officer wasn't calling the shots. Bank examiners were.

My advice is to make sure you not only maintain good relations with your local lender, but keep your key financial ratios up to snuff, especially working capital. Farm loans are so big today, you need to look good on paper as well as character.

So what did you learn from the 80s you hope today's young farmers don't have to learn the hard way?

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Bonnie Dukowitz
8/15/2015 | 11:36 AM CDT
Lessons of the 80's, needs to be expanded quite a bit. Cycles thru out the past 150 years will show many similarities.
Marcia Taylor
8/14/2015 | 2:43 PM CDT
Last month, I asked Doug Stark, now president of Omaha-based Farm Credit Services of America, what he learned from the 1980s debt crisis. He was then sitting across the desk from troubled borrowers, a situation neither he nor anyone else in the system wants to repeat. "We weren't prepared. Lenders and borrowers didn't know how long it would last or what we would face. We learned working capital was king," Stark said. In other words, the paper wealth from over-heated land markets in the 1980s couldn't pay the debt when markets crashed. Cash and other liquid assets are what did. Under Stark's leadership, FCS America's operating motto has been to operate conservatively in good times, so they have the courage to stick with borrowers in the bad. In 2008, FCS America instituted caps on their mortgage lending, basing maximum lending based on long-term corn prices of $4.50, not the $7.50 peak hit in 2012. So when Iowa farmland bounced up to $9,000/acre, FCS America capped the "sustainable" lending level at $5,900. Borrowers needed to pony up larger down payments. Danny Klinefelter, a Texas A&M economist and ag finance expert, calls that effort a model policy and credits FCS America (and other Farm Credit institutions with similar policies) for tamping irrational exuberance in farmland markets this time around. "Farm lenders are much more sophisticated than they were in the 1980s," Klinefelter says. They are less likely to over-extend credit, and they now monitor their portfolios with stress tests to simulate how prices will affect credit quality. If they make a 10-year fixed rate loan, they match it with a 10-year fixed rate bond, not an average portfolio rate. What's more, they recognize that dumping too much farmland on the market at one time reduces everyone's equity, further spiraling a crisis.