Lender: I hope every credit trainer remembers 1980s lessons
EDITOR'S NOTE: This story is the third in a multi-part series: "Farm Crises — The 1980s and now." Agweek will interview experts who can compare the economic and political conditions between what was known as the "farm credit crisis" of the 1980s, a decade when one in four farms failed because of economic losses.
FARGO — Ken Knudsen would just as soon forget the farm stress of the 1980s, but he hopes today's ag lenders remember its lessons.
Knudsen, 63, had a front seat to the farm credit crisis of the 1980s, and he says that today he isn't seeing the restructuring and a shake-out of farm numbers in the Upper Midwest that he did back then. Knudsen retired a year ago as senior vice president of credit at AgCountry Farm Credit Services, based in Fargo.
"At the peak of the tough times, in 1987, about half of our volume was labeled 'adverse,' meaning not meeting typical credit standards," he says. "That compares to about 4% today."
A bit of background: The Fargo-based co-op was under the St. Paul Bank for Cooperatives, chartered in 1933 and a member of the Farm Credit System — all regulated by the federal Farm Credit Administration.
The St. Paul Bank was one of 12 district banks. The banks made equipment and operating loan through Production Credit Associations.
Knudsen in 1980 moved to a PCA post in Fargo and in 1981 moved into a tumultuous career in credit management.
The 'wild stuff'
As Knudsen's credit responsibilities grew, farmers had suffered five years of losses. Interest rates skyrocketed from about 7% to a high of 20% per year. That year, Fargo PCA started a special credit department to work with the increasing volume of troubled loans to farmers.
From 1982 to 1984, what Knudsen describes as the "wild stuff" hit. There was the tax-protesting group known as Posse Comitatus with farmer Gordon Kahl, and a famous shootout with U.S. marshals at Medina, N.D., in February 1983. There were advocate groups like the Farmers Legal Assistance Project that manipulated "no-sale" auctions, where people refused to bid so no money would go back to the lender that was seen as forcing the liquidation. There were tractorcades to draw attention to the plight of farmers.
Farm auction sales started out as "mostly voluntary" from 1981 to 1985, but some turned ugly.
"Loan officers at times got death threats. Some lenders placed plain-clothed guards in their offices," Knudsen says.
By 1985, after years of losses and rising interest rates, land values started to fall for the first time since the 1930s. This hit the Federal Land Banks, which, in many areas, had about 75% market share in land loans.
Knudsen, in concert with farmer boards and colleagues headed by co-op's long-time president Ken Bergh, helped the system innovate its way through the crisis.
In 1982, Knudsen and the Fargo PCA made history at "12:01, a.m., Saturday, May 1," 1982 when it staged the first PCA agricultural equipment lease to farmers Gary and Betty Osborn of Fairmount, N.D. The Osborns leased a Steiger PTA Cougar III, manufactured in Fargo.
The Osborns obtained an annual interest rate of 10.1%, compared to a conventional loan of 15.8% at the time. The co-op technically owned leased machine they made a scheduled buy-out at 10% to 20% of the purchase price. At the time, Knudsen made a point of saying the lease is "a financing tool, not as a last resort for those who can't qualify for a loan."
PCAs started merging with the FLBs in 1985. That year, the FLB of LaMoure, N.D., went under, the first of several to lose all of their reserves due to loan losses. (The LaMoure board was removed by the St. Paul FLB and for a time launched a lawsuit to get their elected jobs back, but eventually withdrew the suit.)
Nationally, the Farm Credit System did not have enough reserves to cover the anticipated losses. The system needed to request a loan from Congress to stay in business but needed to show that it had a plan to survive and repay the loan.
In Fargo, Knudsen developed a group of strategies that could significantly reduce the loan losses and return the system to viability. "If it was less of a loan loss to restructure the interest rate — or sometimes the debt — to obtain more collateral to reduce the loan losses and buy some time for things to turn around we would do so," Knudsen says.
The 'miracle worker'
Larry Buegler, the new president of the St. Paul Farm Credit Bank, presented these workout plans to Congress. Congress passed a $4 billion line of credit as part of the Farm Credit Act of 1987 (actually passed in 1988). Because of the success of these strategies, FCS only used $1.2 billion of the credit line and paid it all back with interest.
Sonja Hillgren, a Sioux Falls, S.D., native, who once was Agweek's political correspondent in Washington, D.C., (later editor of Farm Journal magazine) in November 1991 wrote a profile for Top Producer magazine, headlining Buegler as the "The Miracle Worker" for proving debt workouts were good business for troubled banks and borrowers.
Knudsen worked closely with Buegler on Phase I of the plan, which was loan restructuring for farmers. "If not for the plan, farmers may have lost the FCS," Knudsen says. Many restructures included a "shared appreciation mortgage," Knudsen recalls. If land appreciated in value after the restructure, the borrower owed a percent of that appreciation and it was added back to their loan. Millions in loan losses were recovered in this way.
Phase II of Buegler's plan created "Land Value Guaranteed," which effectively created a "bottom" for land prices because the buyer could give back the property to the FCS at any time within the next five years. No one ever did, because "land isn't going to go lower when there is a 'put' on it," Knudsen explained.
Eventually, interest rates came down.
Crop prices and yields went up.
Knudsen remembers things improving in 1993, as the region entered a wet phase and more farmers shifted from cereal crops to higher-value row crops like soybeans and corn. Land values rose fairly quickly.
Through the middle 1990s, farmers who had owned 25% of their land in the 1980s by the 1990s increasingly bought more of the land they farmed. Operator-ownership percentage increased to 50% to 75%, depending on areas.
The Farm Credit System is not as dominant but still has about half of the farm loans. Banks and credit unions have increased their market share. Seed companies and fertilizer sometimes finance inputs, and equipment dealers finance more of their sales
AgCountry Farm Credit System in 1993 added an agribusiness department in the FCS outside the Bank for Cooperatives, leading to hundreds of millions in loans that now account for 40% of its business. In 1997, Knudsen helped the co-op get involved in financing ethanol plants, and soon became the largest ethanol lender in the U.S.
In 2008, a national economic upheaval had impacts. Congress used tax depreciation policies to "juice" the economy. Farmers and other businesses were allowed to update and improve equipment lines, even as interest rates declined. "Technology kept changing," Knudsen says.
No debt forgiveness
Today, Knudsen estimates that many full-time farms have more than 2,000 acres in the Red River Valley. Landowners who bought more land have more control and don't have to negotiate cash rents and ward off other interested renters every year, Knudsen says.
More owned land means more options. If necessary, farmers are able to sell some land, pay off or pay down debt and improve their cash flow and buy more time. "You see a lot of adjusting going on today — not seeing any debt forgiveness," he says.
Many farmers still are breaking even or making a little money. Seed, fertilizer, chemical and rent is expensive, but interest rates are low.
"There's always options," Knudsen says, if problems are addressed in a timely manner.
"That's why you don't see many foreclosures and bankruptcies today, yet, and I hope we don't," he says. More equity and collateral provide more options and time, but it's "all about cash flow."
"I hope the people in charge of credit training in the ag lending shops went through the 1980s," he says. "When you start to see stress you start dealing with it right away — way before there's significant trouble."