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Treasury’s trillion doesn’t mean credit’s easy

On the day Barack Obama was taking the oath of office as the nation’s 44th president, the U.S. stock market was tanking big-time.

So much for optimism in the financial sector.

Despite infusions of a trillion dollars or so by the U.S. Treasury into the financial system, almost daily the news reports are of more billions in losses by major financial institutions, more business failures, more thousands of job layoffs, and more ravaging of 401(k)s, IRAs, and market-based college savings plans.

In 2008, an estimated $8.4 trillion vanished from U.S. equity markets.

Despite the Treasury’s welfare program for thousands of banks and financial institutions, the credit crisis continues little abated.

Just because banks have billions in bailout money doesn’t mean they’re lending to buy houses and cars, or to keep businesses and farms operating. Most, in fact, are either sitting on the bailout money as a cushion against further massive losses they know are coming, or are using it to buy up other banks.

David Schweikhardt, formerly at Mississippi State University and now professor of Agricultural, Food, and Resource Economics at Michigan State University, has followed all the twists and turns that led to the subprime meltdown and the chaos that has followed.

While the credit picture remains less than pretty, he says, many in agriculture seem inclined to think things are better than they are — that the crisis affects only irresponsible borrowers, not farmers. After all, didn’t 2008 bring record U.S. farm income, record exports, and a strong balance sheet?

Even so, Schweikhardt says, the credit crisis can have an impact on agriculture through several economic channels.

“When considering the availability of credit for the 2009 crop year, farmers should expect lenders to demand more information on repayment ability, including worst-case scenarios, collateral availability, and liquidity. There’s no reason to believe farmers can escape this because of last year’s strong farm economy.”

Greater competition for all forms of credit will also result in higher interest rates, he says. “A strong balance sheet won’t be enough to obtain short-term credit in the existing environment.”

If the credit crisis results in a worldwide recession, as now appears increasingly likely, Schweikhardt says the impact likely will be felt in declining exports and downward pressure on commodity prices.

A worldwide recession will also likely dampen oil prices, and since corn prices have become closely tied to oil, that could put further pressure on corn and other commodities.

With the condition of commercial banks continuing to be shaky and balance sheets eroding, their lending capacity will be reduced, Schweikhardt says. More bank failures would further increase pressures on credit availability.

Credit that many farmers obtain through input suppliers could be tightened by lack of credit availability in the commercial paper market. And pressures in credit markets could limit availability of export credits, resulting in downward pressure on U.S. exports and commodity prices.

“Farmers should expect the effects of the crisis to be felt far beyond the spring of 2009,” Schweikhardt says. “The effects could reverberate in credit markets for years, and those implications should be considered in both short-term and long-term planning.”

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TAGS: Management
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