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Farm credit could be harder to get

“If input prices do not have a downward trend to match commodity prices, it’s going to be very serious.”

–Ian Wishart, KAP

The long arm of the global financial crisis may be reaching out to affect Manitoba farmers and their spring planting intentions.

Farmers say their operating costs for next year’s crop could double in 2009 because of falling commodity markets and continued high input prices.

But a worldwide credit crunch stemming from the U. S. subprime mortgage crisis could mean the extra money farmers need to borrow may not be available, a Keystone Agricultural Producers general council meeting last week was warned.

“Based on what’s happened in the U. S. market, there’s a lot of uncertainty in credit. When we talk to financial institutions, we’re getting, farmers may have to work with what they have now. They might not want to extend any further credit,” said Ian Wishart, KAP president.

“The banks in particular are saying they don’t want to move back into the agricultural market in any significant way. They feel they’re exposed enough.”

Wishart stressed he had no firsthand knowledge and was only repeating what producers say their banks have told them.

But KAP plans an investigation to see if the reports are accurate, he said.

“It’s our job to look into the future and see what’s coming at us before it hits us. We can’t be working on this in April. We’ve got to have adequate answers well before then.”

Wishart said producers also tell him trade credit from agri-retailers, fertilizer dealers and chemical companies may be drying up too.

“Those people are being told that they have no further credit available to them. The banks are telling the agri-retailers in many cases, you have all the credit you’re going to get.”

Wishart said farmers currently working on their 2009 financial projections say they’ll need spring operating loans 1.5 to two times greater than this year’s.

That’s because commodity prices have fallen sharply while the cost of fuel, fertilizer, pesticides and other inputs remains high.

But the flight of credit from the marketplace resulting from the global economic meltdown could hurt farmers’ ability to borrow what they need, said Wishart.

“If input prices do not have a downward trend to match commodity prices, it’s going to be very serious.”

Western Canadian farmers have been through credit crunches before over the past 30 years. The farm crises of the 1980s and 1990s produced massive debts and huge industry consolidation through a combination of double digit inflation, sky-high interest rates and chronically low grain prices.

But this time is different, Wishart said. Back then, farmers could not get credit because they couldn’t show a profit at the end of the year. Today, despite falling commodity prices, positive margins are still possible. But access to financing is limited.

“We’ve never had input financing availability as a limiting factor,” said Wishart. “Assuming we get any recovery at all in the commodity market, we’re going to be able to show we can make money but we’re still not going to be able to get credit.”

Jared Carlberg, a University of Manitoba agricultural economist, said the issue is not a liquidity shortage, but the cost of borrowing money.

“It’s simply not the case that there’s no money out there. But if the demand for money is greater, it’s logical that, despite the efforts of monetary authorities to the contrary, it may cause interest rates to start to increase,” said Carlberg.

“There may still be credit available – but at a higher price.”

Canadian farmers already carry a heavy debt load. According to Statistics Canada, national farm debt as of December 31, 2007 was a record $54.2 billion, including $6.1 billion in Manitoba.

Chartered banks hold 43 per cent of farm debt in Canada. Government agencies (e. g., Farm Credit Canada, Manitoba Agricultural Ser vices Corporation) hold 30 per cent. Credit unions hold 17 per cent.

Dave Kaminisky, chief lending officer for the Austin Credit Union, said farm credit has been pretty easy to get for the last three years. That may tighten up as lending institutions pay more attention to risk and debt-to-asset ratios.

“We’re going to go back to old-time lending. We’re going to price it for risk again,” he said.

But Kaminisky said he did not foresee a credit crunch, especially for grain farmers coming off a good harvest with lots of inventory to sell.

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