Banks Credit and Interest

[farmers_son]

Has anyone noticed any changes at the banks with their credit policies? What about farm suppliers?

I was speaking with the banker yesterday who claimed they were still lending money to agriculture but it was no longer prime plus 1%. It was prime plus 2% and maybe prime plus 5% in some cases.

I notice that the UFA is not providing credit for major input purchases but is using Farm Credit Canada. Our fuel supplier is using Farm Credit Canada too.

The ability of cattle producers to hang onto the cow’s tail will in part be determined by their access to credit. No credit or expensive credit will force producers out.

[farmers_son]

I thought this was interesting although long however it mentions farmers and the Alberta Treasury Branch so I pasted the entire article:

http://www.bloomberg.com/apps/news?pid=20601082&sid=aJFZ_OtDb1C0&refer=canada

Deutsche Bank, Citigroup Threaten Canada Debt Plan (Update3)
By Joe Schneider
Dec. 18 (Bloomberg) -- Deutsche Bank AG, Citigroup Inc. and other banks backing a plan to convert C$32 billion ($27 billion) of insolvent Canadian commercial paper said they will walk away from the deal unless it’s completed tomorrow.

The non-Canadian banks, which include Bank of America Corp. and HSBC Holdings Plc, agreed last year not to demand collateral tied to the paper while holders worked out a restructuring. Peter Howard, who represents the banks, told an Ontario judge today that his clients won’t extend the accord past tomorrow.
“The asset providers are ready to close the deal,” Howard told Ontario Superior Court Judge Colin Campbell at a hearing in Toronto. “Others are seeking enhancements.”

Ending the agreement would free the banks to make margin calls on trusts that own the paper, scuttling plans to swap the short-term debt for longer-term notes and making the paper almost worthless. Caisse de depot et Placement du Québec, the province’s pension plan, holds paper originally valued at C$13 billion. National Bank of Canada’s holdings were originally worth C$2.2 billion and ATB Financial, the Alberta government- owned bank, owns paper once valued at C$1.2 billion.

National Bank fell C$2.28, or 8.2 percent, to C$25.62 at 4:16 p.m. in trading on the Toronto Stock Exchange. The shares have fallen 51 percent this year.

The banks’ stance puts “guns to our heads,” Campbell said. Referring to the first business day after the deadline, he asked, “What happens on the 22nd” of December?

“The unthinkable,” is an option, Howard said.

‘External Sources’
A committee of 17 institutions, including National and Caisse de Depot, said it needs C$9.5 billion in further guarantees from “external sources” to complete the debt conversion. The committee is also attempting to change the credit spreads in the agreements that would trigger margin calls, to give the noteholders more leeway.
“The spreads today are at near-record levels,” Fred Myers, a lawyer representing the committee, told the judge. He said the changes will require further negotiations and asked that bankruptcy protection for trusts holding the asset-backed commercial paper, or ABCP, be extended to Jan. 16.

Campbell granted the request. That doesn’t affect tomorrow’s deadline set out by the banks on the standstill agreement.

Under the plan, in the works for about 16 months, insolvent 30- to 90-day debt would be converted into new notes maturing in about eight years. The asset-backed paper hasn’t traded since August 2007, when investors began to shun the debt because of concerns about ties to high-risk mortgage loans in the U.S.
A collapse of the agreement would leave about 1,800 individual investors, including farmers, students and retirees, with potential losses of their life savings. Under the restructuring, those investors would be fully repaid by Canaccord Capital Inc. and Credential Securities Inc., two Vancouver-based brokerages that sold them the debt.

‘Do-or-Die’
The banks’ threat may be a message to the federal government to backstop the deal with the C$9.5 billion guarantee, Colin Kilgour, a consultant to investors in the frozen debt, said in a telephone interview today.
Howard is “basically saying ‘this is our direct and best shot to the government, threatening that, if you’re not here, this deal is going to go down,” Kilgour said. “This is basically a do-or-die situation.”

Canadian Finance Minister Jim Flaherty said yesterday, following a meeting with his provincial counterparts in Saskatoon, Saskatchewan, that they had some discussions about assisting the plan. Several ministers are reviewing proposals, he said.

The government shouldn’t provide the guarantees, said Eric Sprott, chief executive officer of hedge-fund manager Sprott Inc., which has about C$5.6 billion under management.
“ABCP in this country is worthless,” Sprott said today in an interview. “The money is gone. It’s dead.”

The case is In the Matter of Metcalfe & Mansfield Alternative Investments, C48969, Court of Appeal for Ontario (Toronto).

[farmers_son]

If you are interested, this link explains asset backed commercial paper. I thought it was particularly interesting because it was authored in 2001, well before the financial meltdown ABCP created.

http://pages.stern.nyu.edu/~igiddy/ABS/fitchabcp.pdf

Note at the end of the paper the who's who of the banking industry who were sponsoring ABCP. Notable players were the Royal Bank of Canada, Canadian Imperial Bank of Commerce and back in 2001 Enron (remember them?). BTW, Enron still operates in Canada as EOG Resources.

Sorry for the multiple posts but I think we are watching history unfold in regards to the financial crisis. When you see the name Enron we all should realize the present financial crisis involves way more than home loans to poor black people in the U.S.

[per]

Scary times, fs. Timely topic. This thing has been coming for awhile. I hope that all are prepared but I am afraid some aren't. Had a conversation with a neighbor yesterday. The bank is not willing to work with them. They have been here since the 1880s and never had a moments trouble. All I could suggest was try the FCC. Going to be an interesting year. I hope we can all seize the opportunities that will result from a wreck.

[smcgrath76]

I think there are some banks that are looking to divest investing in agriculture. We can argue all day about the security of real property, escalating land values, etc. I think we will see an interest rate spike from lenders in the not too distant future. Driving producers to AFSC or FCC is probably the most effective method I can think of to enforce legislation. No EFP > no loan, no age verification > no loan, etc.
I further think that access to credit/capital may be a real challenge moving forward beyond the farm gate.
We can talk about farmer owned packing capacity as an example. If there is no access to credit, then any effort such as this would have to be bankrolled by cash directly from producer pockets. In a capital intense business, access to credit is very important.

[per]

Sean, you have me thinking about how to obtain credit if needed. I deal at a bank location that has just 3 agricultural customers. (I asked one day, Not just primary but any Ag specific business) I asked him why. He said he is not sure exactly other than its proximity to the city. He then added that all three of his Ag clients had existing business plans, books in accrual and cash and conducted themselves like any other business. I am not trying to suggest that Ag folks don't all do these things, those were the bankers words. However, having a plan and revisiting it has helped us foresee and react to some of these troubles like credit availability. Now if they don't want to lend to you because you are in Ag then all that is left is FCC etc. and the risk of loans being tied to compliance.

[grassfarmer]

Sean, I'm not following your logic on this one at all. You say "I think we will see an interest rate spike from lenders in the not too distant future. Driving producers to AFSC or FCC is probably the most effective method I can think of to enforce legislation. No EFP > no loan, no age verification > no loan, etc."
I agree we will see an interest rate spike at some time in the future but what is the connection between that and compliance with legislation? Are you suggesting that the Alberta or Federal Governments are influencing banks to stop lending to agricultural businesses in order to force them to comply with new legislation?

[kato]

We've been FCC clients for a few years now, and would never go back to the bank. We started drifting from the bank when cattle crashed in 96, and then when BSE hit, their behaviour toward us, and other local cattle producers at the time was what caused us to completely sever ties with them. We've never regretted it, and FCC has never requested anything in return for compliance with any government programs.

We really don't trust a commercial bank to be there if we really need them. It seems like they are only interested in lending money to people who don't need it. They were almost begging us to borrow money for expensive bred cows once, and we refused it. Sure enough a year later the market was off, and guys who'd taken the bait took a real beating when the bank forced them to dump the cows cheap. And then a year later, those cows were up again. We were so glad we hadn't borrowed any money for the expensive cows like they wanted us to. Instead we waited and bought the cheap cows.

The banks just can't see ahead in a situation like that. If you get in a bind, they'll cut and run. Gotta take care of those shareholders you know...

Just my opinion, but it comes from things we've seen and experienced first hand.

[smcgrath76]

GF - I don't think that the government is either for or against the banks in ag. They have created entities that make it difficult for banks to compete in the sector. I haven't seen a bank that can match the AFSC interest rate for young producers, or that has the flexibility of products of FCC.
I actually think that compliance with rules outside of finance will apply in the not too distant future for any lender. Will a bank want to lend on an asset that is not protected by an EFP? Will they lend to a company that can't participate in CAIS because they are not compliant with AB Gov regulations? I think in the long term this is a risk mitigation process for them, and probably a smart move to protect their financed assets.
I don't know when the interest rate increase will happen, but I am sure it will, and it will change a lot of businesses in a hurry.

[farmers_son]

My banker says interest is going to stay low for two years. I wouldn't bet the farm on it.

[farmers_son]

Check out Stats Can
Farm Debt Outstanding:

http://www.statcan.gc.ca/pub/21-014-x/21-014-x2008002-eng.pdf

Farm debt by source:

43% chartered banks
30% Government Organizations
17% Credit Unions
9% Private and supply companies

Total farm debt outstanding end of 2007 was $54 billion dollars. Which if I am correct is more money than the automakers owe.

I have not found numbers to itemize what portion of that $54 billion is fixed and what is floating but if we assume that the 30% owed to Government organizations is fixed and the other 70% is floating than even a modest change in the prime will have a huge effect on agriculture.

I checked the Bank of Canada http://www.bankofcanada.ca/en/rates/interest-look.html

In the last 10 year period:

Low bank rate was 2.24% August 2004
High bank rate as 6% December 2000
Average bank rate for the 10 year period was 3.84%

The Bank of Canada rate is presently 2.5%

It is reasonable to assume rates could increase to 6% again (and they could go much higher). A 3.5% increase in the cost of debt given a farm debt with floating interest of $37.8 billion would cost Canadian agriculture an additional $1.3 billion each year for interest alone assuming overall debt levels did not increase.

Put in perspective…realized net farm income was $1.2 billion in 2006. An increase in interest rates of 3.5% would pretty much wipe out most if not all realized net farm income.

In 2007 total Canada farm program payments amounted to $4.1 billion.

The Canadian automakers just got $4 billion.

GM worldwide automotive debt is $30 billion, their bonds have been downgraded to junk status.

I could not get numbers but if we assume Chrysler’s automotive debt to be less than $24 billion than the worlwide debt of these two car makers is roughly equivalent to debt burden being carried by Canada’s farm men and women.

Why isn’t there an equivalent concern over the farming sector?

[kato]

When the Liberals were in power they ignored us because we were not the ones who voted them into power, being mostly from the West and mostly voting Conservative.

Now that the Conservatives are in power, they ignore us because they are confident that whatever they do, we will vote Conservative.

The bottom line is that there are not enough people who vote who care about agriculture. Voters care if they lose jobs in the auto industry. Voters care if the local mall shuts down. Voters care if their pension funds lose value. Voters don't care if we are here or not, because they mistakenly think that they can always get food from somewhere else.

We are not on the radar. However, we need to be right up front and center, because the bottom line is that whatever else happens in someone's life, they still need to eat. If more consumers saw and appreciated just how important food security is to a country's well being and independence, they'd be backing us up.

People in this country have never been hungry, and if you've never been without something you really don't appreciate it. We need to be more proactive about getting that message out, and we'll keep on being ignored until we do.

[grassfarmer]

Excellent post Kato! I think you are bang on - now if we can only find a way to make farmers become proactive.

[perfecho]

I do agree with the premise, however I feel the consumer cares about where there food comes from, just don't resize what is happening. And that is where we, as farmers fall down.
The feds and province say X$'s are going into ag...we have leaders like fearless Ralph that, in his words" don't worry, we will take care of our farmers". It's their job to make it look like it is all "good down on the farm". The average consumer has no idea how much of a struggle it is....because we do little to educate them to the truth. That is our job.

The auto industry has lobbyists letting the governments know they are in tough times as they fly their corporate jets to ask for handouts, banks that ask for lower interest rates to increase lending as they keep half the spoils for their "operating", packing plants that need restructuring packages to "compete". In the mean time, we look at ways of cutting costs, again, even though prices remain constant or increase in the retail sector.
I agree GF and Kato, until we do something, educate the consumer so they will pressure the government or create a shortage (or at least perceived shortage), we can't really expect anything to change.

[coppertop]

Our 'lobby groups' don't all sing from the same songsheet ! If they did, and if they 'sang' loudly and consistently to all levels of government, perhaps the dollars injected into the industry would be of long term value.