The credit crisis has become boring. Even x-hundred point moves in the Dow are ho-hum now. Been there, lost that. So after we get this pesky election off the news cycle what could happen next in this wacky year of 2008?
Lot o' layoffs. While credit may be starting flow, it ain't cheap or easy. And spending is plummeting, so look for a wide array of cutbacks in employment.
When the dot-com and housing bubbles burst, it was easy to see what types of jobs would disappear. But these days as nervous lenders cower and credit contracts, virtually every industry is likely to be scathed in the widely predicted downturn starting this autumn. Nearly every business relies on credit to operate—just as they need customers to have spending power.How could this affect agriculture? First, by reducing the usual off-farm income that supports many smaller operations. My take is this will make consolidation offers from neighbors - especially if employment is included - look pretty good. Remember the top goal (whether many acknowledge it or not) for many small operators is to live where they now live, not how they make their money.
With lending trimmed, and companies and consumers tightening their belts , jobs will be cut across broad swaths of the economy, from the tech sector to investment banking, and from manufacturing to soft drinks.The four-week moving average of U.S. jobless claims hit its highest point in seven years, the Labor Dept. reported on Oct. 20. The average number of new jobless claims rose to 483,250 for the week ended Oct. 11, the highest since 2001. September's unemployment rate was unchanged at 6.1%, but economists generally predict the labor picture will deteriorate in coming months.[More]
Second, we will have a period of interest rate and lending turmoil. For example, my small bank is in excellent shape, doing what small banks do: taking deposits and making loans. They also have plenty of money for their regular customers - and even more if they raise their capitalization by participating in the goverment bailout. When I talked with my banker yesterday, I pointed out the irony that as the Fed lowered interest rates - and effectively the prime rate - the interest on my variable was dropping. Meanwhile across town the Farm Credit System is having a tough time flogging their AAA bonds to investors causing their interest rates to jump upward. Unsurprisingly, she was way ahead of me.
In the last week, virtually every Farm Credit Association in the country has been forced to impose record, one-time hikes in operating credit and farm mortgage rates. Five-year adjustable mortgages for qualified customers at Louisville-based Farm Credit Services of Mid-America, for example, jumped to 7.35 percent this morning, up from 6.15 percent on Oct. 8. Libor-indexed variable-rate operating credit now runs 7.3 percent, up from 5.25 percent during the first week of October. For the moment, variable-rate operating loans (which flex with prime rates) are set at 5.4 percent. (See DTN's Ag Interest Rate Snapshot, updated daily on the Farm Business page.)
In e-mail messages, FCS of Mid-America's Treasurer Bill Lankswert said financial markets are undergoing more uncertainty than at any time since the Great Depression. The 30-day Libor rate is used to price short-term borrowing by many agricultural producers and agribusiness and "is an indication of costs for most other businesses in the United States," Lankswert noted. "In the past week, the rate peaked at 4.56 percent, up from less than 2.50 percent just two weeks ago. The increase in the Libor and other related rates mean that many borrowers will, or have already, seen a quick increase in short-term borrowing costs."
Omaha-based FCS of America prices its retail loans based on a slightly different formula, but customers who thought their operating lines bore some link to the nation's prime rate will be disappointed. "All of the normal benchmarks we have used to price loans have changed," said Stark, whose territory covers Iowa, Nebraska, South Dakota and Wyoming. "Even prime rates bear no relationship to our costs anymore. Borrowers who were normally charged rates of a half-point under prime may find themselves at a half-point or one point over prime now." [More]
This outcome was easily predicted - heck even I saw it coming. But suddenly the big advantage FCS had over banks - access to unlimited capital - has become their Achilles heel. Until credit worries perk up interest in commercial and quasi-government paper, they will struggle with competition.
One player I look to step up big-time is Rabobank. Their extremely conservative Dutch manangment (trust me I know - my father-in-law was Dutch and pretty ummm, tight) has them in a strong position just when they are poised to woo the top tier of ag loans.
While this will lead to higher margins, we will have to pay more attention to the funding than in the past. We must enter into reciprocal relationships with clients. This means that, while we have until now often been a primarily credit-driven organisation, we must now also focus on including savings and deposits in our client relationships.
Rabobank is in good shape. It is, in fact, rock solid. This is the result of 100 years of frugal banking. We have always ensured that we maintained extremely strong buffers. We have a Tier-1 solvency ratio of more than 10 percent and a well-diversified range of activities. The crisis does, however, demand that we realign our strategy for the Netherlands and abroad.
In the Netherlands we must seize opportunities primarily in the business market and in the field of private banking. In the international arena we must focus even more sharply on our core business, i.e. food & agri and sustainable enterprise (CleanTech). We must move forward with the expansion of retail in other countries, including intensifying our activities in developing countries. This forms part of our commitment to implement Raiffeisen’s mission in the year 2008. [More]
My banker has already made it clear that any new lines of credit probably won't be my usual x points below prime. In fact, I anticipate an interest rate floor, as the Fed could to take the prime to dang near zero.
Bottom line, the dating game between lenders and farmers has just entered a wild new phase. Personally, I'm buying candy for my banker. And I may start taking back the dozens of free pens I been filching. There will strong competition from those whose credit is rationed and interest costs are jumping upward. Savvy borrowers are doubtless in her office now trying to get their dirty paws on my loan money, I bet.
Creidt may be easing, but it won't spring back instantly. Some signs are hopeful and talk is increasing of another stimulus package. What to wish for: depreciation breaks, personal exemption, and the Holy Grail: investment tax credits for everything! What we'll more likely get: stupid old roads and bridges.
More thoughts about how the New Financial Order will look from Route 2 as inspiration strikes.