Published: November 26, 2008 11:11 am            

Are Wall Street crises impacting Main Street, Minn.?

Originally published in the Nov. 14, 2008, print edition.

For the most part rural banks are pretty much isolated from the financial crisis of Wall Street, according to Paul Wilson, vice president of Farmers & Merchants State Bank in Clarkfield. And that opinion is shared by most rural Minnesota bankers.

“If interest rates go up that effects our customers, but there is plenty of credit available in our rural banks,” Wilson said. “We’re not tied into the sub-prime lending market that apparently has been the major cause of this crisis. ... Even Wells Fargo, the largest agricultural bank in the country, has lots of credit available. Only 1 percent of their portfolio was in the sub-prime sector.”

Wilson suggested there may have been some scare tactics used to persuade members of Congress to vote for the bailout measure. “I think there was some misinformation aired on national media about how this was effecting Main Street. It might be Main Street, Chicago, but it’s not hurting Main Street, Clarkfield.”

Speculators have moved on

Right now the farm sector is being affected by the declining commodity market, which appears to be related to the meltdown on Wall Street, said Gary Pawlitschke, branch president of Profinium Financial Inc. in Truman.

“Big investors have apparently pulled out of the funds market which was partially supporting the price of soybeans and corn,” Pawlitschke said. “And that has caused commodity prices to drop substantially the past two to three weeks. Essentially that was ‘speculator money’ that has now gone elsewhere. ... Lending to our ag community has not changed.”

He said that if the banking world keeps making changes, there could be some bottom-line impacts even for rural banks. For instance the new $250,000 guaranteed depositor provision, which runs until December 2009, will cost member banks with FDIC funding. That could affect profitability for a local bank until the premium has generated enough reserve capital.

Pawlitschke said his farm customers aren’t nervous about the Wall Street sub-prime financial fiascoes. But a growing concern is the profitability of the 2009 crop season. He pointed out that the 2009 crop would be the most expensive ever in view of escalating seed, fertilizer and land costs. With today’s corn and soybean prices, they’re not able to project a profit for next year. “The figures are showing $4.50 to $5 corn and $10 beans to make it work next year,” Pawlitschke said.

Land rents already are pretty much established for next year, he said, so 2010 may be the first indicator of changes in land values because of the weakening of the nation’s overall economy.

2009 to be ‘dicey’ year?

Michael Core, loan officer at United Southwest Bank in Vesta, said, “in my opinion our bank lending policies are working good and this sub-prime issue is not a factor out here. However, the way production costs are spiraling upwards, 2009 looks like it could be a dicey year for farm profitability.”

He noted operating lines with farm customers have been comfortable and easy to work with the past couple of years.

“But this year I’m sitting down with each customer,” Core said, “and we’re going to do a complete cash-flow projection for 2009. I think it will be an eye-opener for both of us. However, this Wall Street financial dilemma doesn’t directly effect the people I do business with on a day-to-day basis. It’s likely causing us to be more certain that we are dotting our I’s and crossing our T’s more accurately.” He said their lending rates have gone down, making borrowing money cheaper.

Rate changes

“The Federal Reserve is holding rates steady, and possibly lowering rates,” said Mark Brown, financial services officer at AgStar’s Mankato office. “But the rates for pool money coming in to buy corporate bonds, Treasury notes and farm credit bonds is higher now because of risks in the market for these bonds.

“Most local banks are lending out their own money so their rates haven’t changed. But we at AgStar will see our money costs increase slightly so rates to our customers will likely go up perhaps 1/4 to 1/2 percent. But that will happen gradually as the prime rates go up. However the ripple effect will likely impact the cost of money to everyone eventually.”

Brown is not concerned about money to finance agriculture. “The farm sector in general is very healthy. On our last review, 98 percent of our farm loans were classified as being acceptable compared to back in the ’90s when it was more likely a 50-50 status on quality of our farm loans. Next year might be a different story because inputs are driving up production costs so drastically.”

        

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