Agri-Loan Demand Softens Following Instability of 2008

Farm Credit Services of Western Arkansas has the resources to meet any loan request, but demand for new credit remains soft so far in 2009.

Ken Knies, regional vice president of FCS in Fayetteville, said uncertainty about the broader economy and instability in prices make it a challenging time for farmers and ranchers.

“There is not high demand for new production activities,” Knies said. “That’s consistent with the general economy.”

FCS, a member-owned cooperative, had a total loan portfolio of $636 million as of the third quarter of 2008, the most recent data available. That was down around 12.7 percent from its total loan portfolio of $729 million as of Dec. 31, 2007.

“We don’t have a set loan level, and we can participate loans with other farm credit services,” Knies said. “It’s not a problem to meet the dollar demand.”

Knies said FCS is coming off a “very good year” and he enjoyed a little Christmas in February as he traveled to various members of the cooperative handing out shares of the $4.3 million in patronage income.

With around 4,000 members, the average return was around $1,100. Knies said it was the 12th consecutive year FCS has returned patronage income to its members.

Knies was particularly proud of paying the dividend despite a very difficult 2008 that saw credit markets freeze during the fall and spiking fertilizer and grain costs batter the input expenses of many Northwest Arkansas livestock producers over the summer.

FCS also took a significant writedown to its third-quarter income when it shifted $2.4 million to its loan-loss allocation following the shutdown of the Pilgrim’s Pride operation in Clinton.

The loan-loss allocation comes straight out of FCS’ net interest income, more than halving the third-quarter figure to $2.46 million in 2008 versus $5.47 million in 2007.

Were it not for that allocation, FCS would have beaten its third quarter 2007 net income by nearly $1 million.

On the plus side, the Pilgrim’s Pride writedown is the only blemish on the FCS third quarter report. Its risk loans as a percent of its total loans were just 0.2 percent, and total delinquencies accounted for just 0.6 percent. Both those numbers were down from 0.6 percent and 0.8 percent on Dec. 31, 2007.

Low interest rates are available, Knies said, ranging from mid-5 percent to 8 percent depending on the length of the loan and whether the borrower takes a variable, adjustable or fixed rate.

FCS’ loan portfolio ranges from $10,000 used equipment purchases to rural home mortgages to multi-million dollar deals.

Knies expects demand to remain soft through a “big part” of 2009, but he also sees an opening for FCS.

“We’re always looking for opportunities to help rural homeowners,” he said. “A lot of our growth comes from our customers’ referrals. This is an opportunity for us to get out and touch some people we haven’t in the past.”

Terry Vest, senior vice president for collateral services at FCS and an accredited rural appraiser, said farm prices have returned to their 2003-04 levels after peaking around 2005. The marketing time for rural property in western Arkansas has increased to between 6-18 months from an average of around 3-6 months in 2005, with certain submarkets doing better than others.

“The few sales we are seeing are showing stable values,” Vest said.

Vest also said that larger operations are moving slower than smaller ones, with more buyers able to purchase a 40-acre operation than a 1,000-acre one, and the smaller operations fetching a better price per acre.

“You always find exceptions,” Vest said. “It’s more difficult than ever to make an assessment.”