Down on the Farm

2007 was a good year for rural America. Driven by "bumper crops, strong demand, and high prices" in commodity markets, farmers across the United States enjoyed an "exceptional year". Strong conditions continued into the first half of 2008, spurring farmers to increase "purchases of capital equipment and household consumption," and fueling "double-digit percentage gains in cropland values," in many areas of the nation.

Unfortunately for rural America, these boom times appear to be drawing to a close. Over the past few months, prices for wheat, soybeans, corn, and other commodities have come back to earth, while input costs have soared. According to the Fargo Forum, the USDA calculates that expenses faced by farmers "increased half as much in just the past year as they rose in the previous 15 years combined," leaving farmers "hard-pressed to make money next year even if they enjoy good yields". This has left many farmers concerned that farm country may be facing a repeat of the lean times faced during the farm crisis of the late 70's and early 80's. One long-time farmer, Harlan Meyer of Davenport, Iowa, expressed his reservations about the situation to the AP, stating that,

"I guess you could say there's an awful lot of concern in the rural communities and with some of the city people... I would think there would be a lot of cautiousness among farmers because most of the people can remember the '80s and I would think there's probably a lot of cautious people now on spending a lot of money."

While rural communities may be facing tougher economic times in the face of a bursting commodity bubble, it appears that their banks will be able to meet such challenges from a position of relative strength. According to Reuters, banks throughout rural America "are not freezing credit to customers like large money center banks, offering a bright spot in an otherwise gloomy economy". Such banks have "largely steered clear of the subprime housing loans," have "low to no exposure," to credit derivative instruments, and are able to draw on a strong base of deposits to continue to provide loans. Those loans will also be made at far better terms than those seen during the farm crisis, with banks today offering farmers "interest rates that are one-third or one-half of what they were in the late 1970s."

While conditions may have some ways to go to match the bleak days of the farm crisis, some legislators are already expressing concern about access to credit in farm country. This week, Sen. John Thune of South Dakota called for a hearing to explore the impact of the credit crisis on rural America. While rural banks may be in relatively sound health, it appears that those same banks are, according to the AP, requiring "more collateral and higher interest rates," for loans, and are, in the words of a Texas A&M economist, "turning conservative". However, the AP also notes that even in the face of such tightening, lending will continue, as "the industry's traditional lenders — independent commercial banks — are on more solid financial footing than the country's largest investment banks and commercial banks".