Rice Farming

Credit Crisis & Farm Lending

How will the current economic environment
affect rice farmers?

Editor’s note: The current credit situation and how it will affect farmers will be an important topic at the USA Rice Outlook Conference this year. The Arkansas Rice Council encourages all rice producers and media to attend. The conference will be held at the Peabody Hotel in Little Rock, Ark., Dec. 7-9. For more information, contact Jeanette Davis at jdavis@usarice.com or (703) 236-1447.

Q. How big is the rice industry in Arkansas?

Arkansas leads the nation in rice production. Arkansas farmers produce about 80 million hundredweight (cwt) of rice annually, which is 40 percent of the U.S. crop.* The farm gate value of Arkansas-grown rice is about $700 million.** An estimated 30,000 Arkansas jobs are associated with rice production and distribution. There are an estimated 3,000 rice farms in the state.** The estimated economic impact of the rice industry in Arkansas is $2.5 billion.

Q. Will the credit crisis have a significant impact on farm lending in 2009?

AgHeritage FCS in Little Rock is part of the Farm Credit System, the largest agriculture lender in the United States. AgHeritage and Farm Credit MidSouth in Jonesboro, also an FCS affiliate, are the largest lenders to rice farmers in Arkansas. AgHeritage CEO Greg Cole gave this outlook for 2009:

“The total impact of the national credit crisis is unknown at this time,” Cole says. “However, it appears that there should still be plenty of capital available to growers in 2009. We (FCS) still have a very good capital situation, and I think it is safe to say that there are a fair number of local banks that still have a desire to lend to farmers.

“At this time I don’t foresee any scenario where rice farmers with good credit ratings cannot get farm loans,” he adds.

Q. How will the current economic situation affect rough rice prices?

The price of rough rice has been on a roller coaster for the past 24 months. According to the Chicago Board of Trade, rough rice was trading for $9.50/cwt in October 2006. In October 2007, it was at $11.50/cwt. In April 2008, it reached $24/cwt but has since fallen to about $15/cwt. Predicting prices for 2009 is practically impossible, but we can probably expect more volatility.

Q. Will rice production in Arkansas increase in 2009?

USDA Rice Projections, April 2008:

“Expansion in rice plantings is sharply limited by high fuel and fertilizer prices and strong returns for alternative crops. Despite rising prices for U.S. rough rice over the next 10 years, plantings are projected to increase 25,000 to 50,000 acres a year and to remain 200,000-400,000 acres below the (record) 2005/06 level. The Delta is expected to account for nearly all of the modest expansion.”

The USDA Rice Projections report was released before the credit crisis hit in the fall of 2008. It is unknown what impact the national economic situation will have on rice planting in ’09.

Q. Will the credit crisis have any other indirect impact on farmers?

The current credit crisis, coupled with recent commodity price volatility, could challenge some agribusinesses, such as commodity marketing companies that borrow large sums of money. These companies could be challenged with regard to their ability to access sufficient capital to meet their business plans. In the case of marketing companies, this could impact their ability to offer the variety of commodity pricing options as they have in the past. In a situation where commodity prices and input costs are extremely volatile, limited commodity pricing options increase risk to farmers.

Q. Will smaller, regional banks be affected by the credit crunch?

Kip Norton is president and CEO of Corning (AR) Savings and Loan. His bank is located in an important rice-growing area.

“We are well capitalized to meet the needs of all qualified borrowers, especially those in agriculture,” Norton says. “Most banks in the rice-growing regions of Arkansas are similar to us, so I don’t anticipate any significant restriction in ag lending. Ag lending is a major part of our commercial loan portfolio, and we expect that it will continue to grow.

Q. Has the national economic situation had an impact to the rural, rice-growing areas of Arkansas?

“The overall economy of our area remains sound,” Norton notes. “We’ve seen very little effect from the national credit situation or the economic slowdown. Any impact that we may feel from a national economic recession would probably occur later in 2009, if at all. The most likely effect of the current economic climate may be a tightening of credit available from major national lenders or manufacturers, but that remains to be seen.”

Q. What other financing challenges will face rice growers in 2009?

The complexity of farm management and the potential degree of financial risk to the producer is greater than it has ever been. There are several causes: the credit crisis, extreme volatility in commodity prices and input costs and record high farmland values.

Also, because of economic issues at the manufacturing level, producers must make equipment purchase decisions six to eight months in advance.

The implications of decisions for farmers are huge and can make a difference between a profit or loss in a given year. In this environment, farmers must focus on building working capital, managing risk and developing a relationship with an ag lender that has expertise and ample lending capacity.

The Arkansas Rice Council contributed the information for this article.

** Arkansas Agricultural Statistics Service