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Crisis in Farm Finance - Banker's Perspective

H. D. McRorie*

My role in this afternoon's presentation is to give a banker's per- spective of the topic - "Crisis in Farm Finance." Let me start with two observations: First, I think that the word "crisis" badly overstates the current position with regard to farm finance--a point of view that I ' l l develop more fully in a moment. Second, if the word "crisis" must be used, then it seems to me that it would be more appropriately direct- ed at current farm income levels which is really where our financial problems are largely centered.

There are problems in farm finance, to be sure. But the bulk of these problems originate from a severe cost/price squeeze that has plagued the industry over the last several years. The problem has been intensified by a significant decline in farm property values--part of the fallout from our relatively successful battle against inflation. The high interest rates used during the course of this anti-inflation battle have caused the early demise o f many of the heavily leveraged farm operations and inflicted serious damage on the remaining survivors in this group. By and large, however, if farm income had kept reason- able pace with input costs during the past several years, I would sug- gest to you that many of our current financial problem cases wouldn't be facing the problems that they are today.

An Overview of the Current Situation Whether one puts the blame on the cost/price squeeze, poor financial

management, improper lending practices, or whatever. we do have a much larger incidence of farm financial problems today than has been the case over the past several decades. We've had numerous surveys. quasi-sur- veys and outright judgment calls with respect to the seriousness of the problem. Depending on who you are listening to, the farm industry is either in the final stages of survival or has once more demonstrated its ability to enter a longer run survival mode in anticipation of the next upswing.

I can't throw any specific light on the overall status of the indus- try, but I can give you a general assessment of the problem as indicated by the lending experience within the Royal Bank.

Major Canadian banks today are "on-line," which is to say that an ex- tensive computer network now links virtually all of the branches with a

* Vice President, Agricultural Services, The Royal Bank of Canada

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c e n t r a l da ta g a t h e r i n g f a c i l i t y . I n t h e p r e " o n - l i n e " days, we d i d n ' t u s u a l l y have a good f i x on ou r l o a n p o r t f o l i o excep t a t each q u a r t e r - end, and even then, we may have been seve ra l months removed from t h e s t a r t o f a s e r i o u s l o a n problem b e f o r e t h e d a t a was f i n a l l y a v a i l a b l e . Today, v e r y d e t a i l e d l o a n r e p o r t s a r e a v a i l a b l e each month, u s u a l l y w i t h i n seve ra l days of a month-end c l o s i n g . Not o n l y i s t h e d a t a much more c u r r e n t , b u t e q u a l l y impor tan t , i t i s f a r more comprehensive and d e t a i l e d i n n a t u r e . I n theo ry a t l e a s t , we can spo t an emerging problem o r t h e s t a r t o f an u n d e s i r a b l e t r e n d e a r l y enough t o take any remedia l a c t i o n t h a t may be a v a i l a b l e .

And what a r e these numbers t e l l i n g us? F i r s t , a l l o f t he f i v e major Canadian banks and t h e c r e d i t un ions r e c e n t l y d i d a comprehensive c l i e n t by c l i e n t assessment o f c u r r e n t problem fa rm loans i n t h e p r o v i n c e of Manltoba. farmers cons ide red t o be f a c i n g f i n a n c i a l d i f f i c u l t i e s were separated i n t o th ree groups. Group 1 were those farmers deemed t o be i n v a r i o u s s tages o f l i q u i d a t i o n . A t o t a l o f 162 farmers o r 1.03 pe rcen t o f t h e combined 15,600 bo r row ing accounts f e l l i n t o t h i s ca tegory . The second group was d e f i n e d as accounts where s e r i o u s problems have been i d e n t i f i e d and l i q u i d a t i o n a f t e r t h e n e x t c r e d i t r e v i e w was a lmost c e r - t a i n i n the absence o f any major improvement. A t o t a l o f 158 c l i e n t s o r 1.01 pe rcen t were i d e n t i f i e d i n t h i s group. The f i n a l group was made up o f those farmers who had f a i r l y s e r i o u s f i n a n c i a l problems b u t who should be a b l e t o c o n t i n u e w i t h a p p r o p r i a t e deb t r e s t r u c t u r i n g . T h i s group comprised 321 c l i e n t s o r 2.06 pe rcen t o f t o t a l bo r row ing c l i e n t s . These s t a t i s t i c s were developed as o f January 31. 1985. F u r t h e r d e t e r i - o r a t i o n may have taken p l a c e s i n c e then, but a t t h a t t ime. t h e s e r i o u s problem cases amounted t o j u s t over 4 p e r c e n t o f t h e bo r row ing c l i e n t s . Or t o put i t another way, something l i k e 96 p e r c e n t o f Nan i toba farmers were judged by t h e i r lender as n o t b e i n g i n s e r i o u s f i n a n c i a l d i f f i c u l - t y , a t l e a s t t o t h e p o i n t where f u t u r e farm s u r v i v a l was a t s e r i o u s r i s k .

The s tudy t h a t I r e f e r r e d t o above was o n l y done f o r t he p r o v i n c e o f han i toba . I n the Royal Bank. however, we conducted a s i m i l a r s tudy i n each p rov ince . The numbers t h a t we a r r i v e d a t were v e r y s i m i l a r t o t h e s i t u a t i o n i d e n t i f i e d i n Manitoba. For ins tance , we c a l c u l a t e d t h a t f o r Canada as a whole, a t o t a l o f 1.16 p e r c e n t o f our bo r row ing c l i e n t s f e l l i n t o Category I , t h e p robab le nonsurv i vo rs . A t o t a l o f 1 . 2 p e r c e n t were i d e n t i f i e d as p robab le f a i l u r e s by t h e t i m e o f t h e n e x t c r e d i t rev iew . A f u r t h e r 2.38 pe rcen t were i d e n t i f i e d as hav ing s e r i o u s f i n a n c i a l d i f - f i c u l t i e s b u t capable o f s u r v i v i n g w i t h a p p r o p r i a t e r e s t r u c t u r i n g . I n t o t a l , our survey i n d i c a t e d t h a t 4.74 p e r c e n t o f our farm bo r row ing c l i e n t s across Canada f e l l i n t o t h e f o r e g o i n g t h r e e c a t e g o r i e s . I shou ld a l s o n o t e t h a t we e s t i m a t e t h a t a lmost one-hal f o f our t o t a l farm c l ~ e n t s a r e d e p o s i t o r s who do n o t borrow. That would suggest t h a t those farmers exper ienc ing f i n a n c i a l d i f f i c u l t y comprise something l i k e two- and-one-half pe rcen t of our t o t a l farm c l i e n t base.

I n a d d i t i o n t o the f o r e g o i n g da ta , o f course, we a l s o have our ongo- i n g month ly l o a n d a t a s e r i e s w i t h respec t t o l oan de l i nquenc ies , nonper- f o rm ing loans, and a c t u a l l oan losses. These f i g u r e s are, i n f a c t , now i n d i c a t i n g a f u r t h e r d e t e r i o r a t i o n i n our c r e d i t p o r t f o l i o over t h e pas t

severa l months. P a r t of t h a t d e t e r i o r a t i o n i s due t o our own i n t e r n a l e f f o r t s i n r e c e n t months t o b e t t e r i d e n t i f y problem accounts w i t h i n our mortgage p o r t f o l i o , b u t p a r t i s a l s o s imp ly due t o t h e i n e v i t a b l e r e - s u l t s o f a c o n t i n u i n g income squeeze.

Loans where i n t e r e s t has n o t been c o l l e c t e d f o r 90 days o r more a r e d e f i n e d as nonproduc t i ve loans. C u r r e n t l y , our nonproduct ive loans a r e r u n n i n g a t about 6.6 percent , e x c l u s i v e o f our mortgage loans and 8.8 pe rcen t i f b o t h genera l loans and t h e r e a l e s t a t e mortgage loan a r r e a r s a r e combined. By way o f c o n t r a s t , our genera l loans were r u n n i n g a t about a 5 pe rcen t nonproduc t i ve r a t i o through most o f 1985 w i t h an add i - t i o n a l i nde te rm ina te a r r e a r s amount i n t h e mortgage p o r t f o l i o - - a n amount which had n o t been s p e c i f i c a l l y broken o u t a t t h a t t ime.

Our nonproduc t i ve government guaranteed loans a t t h i s p o i n t i n t ime a r e runn ing a t less t han two pe rcen t o f t h e t o t a l guaranteed loan pack- age. I m i g h t a l s o say, however, t h a t government guaranteed loans make up less t han 7 pe rcen t o f our t o t a l loans t o farmers so we d o n ' t p a r t i c -

' u l a r l y look t o our s a l v a t i o n by way o f a f a l l - b a c k on these guarantees.

Whi le d e a l i n g w i t h our loan p o r t f o l i o exper ience t o date, i t m igh t a l s o be u s e f u l i f I reviewed our exper ience w i t h farm loans extended un- der t h e Small Business Development Bond and t h e Small Business Bond p ro - grams. As you probably know, these programs p r o v i d e f o r s p e c i a l low i n - t e r e s t r a t e loans t o c l i e n t s who a r e exper ienc ing f i n a n c i a l d i f f i c u l t y and where t h e i n t e r e s t r a t e concess ion i s presumed t o be a s i g n i f i c a n t f a c t o r i n t h e i r f u t u r e s u r v i v a l . These loans a re funded by t h e banks o u t o f t h e i r own loan pool and no government guarantee e x i s t s w i t h r e - spect t o recove ry o f t h e loans. The b a s i s f o r t h e lower i n t e r e s t r a t e i s s imp ly t h a t banks do n o t have t o d e c l a r e t h e i n t e r e s t revenue from these loans as income and can t h e r e f o r e charge what i s e f f e c t i v e l y an a f t e r - t a x l oan r a t e . Nonproduct ive loans i n t h i s category a r e c u r r e n t l y a t almost 13 percen t and t h i s f i g u r e i s now w e l l above the 9.8 pe rcen t exper ienced a t t he same t ime l a s t year . That r a i s e s the q u e s t i o n as t o whether o r n o t these s p e c i a l t rea tmen t programs a r e an e f f e c t i v e means o f b r i n g i n g about a turnaround i n f i n a n c i a l l y t r o u b l e d farm o p e r a t i o n s .

L e t me conciude t h i s assessment o f c u r r e n t loan problems w i t h a couple o f a d d i t i o n a l obse rva t i ons . F i r s t , I ' v e g i ven you o n l y t h e Royal Bank's f i g u r e s , b u t I suspect t h a t these a r e n o t a g rea t deal d i f f e r e n t f rom the o t h e r major banks. Second, t h e b i g g e s t change i n our own prob- lem loan accounts over the pas t year o r so has n o t been the o v e r a l l i n - crease i n l oan a r r e a r s so much as i t has been t h e apparent s h i f t o f t h e problem from t h e east t o the west. Indeed, our nonperforming loan s i t u - a t i o n i s now improv ing i n On ta r io . Quebec and the a t l a n t i c p rov inces , even though these reg ions gave us t h e g r e a t e s t concern a t an e a r l i e r p e r i o d . The problem seems t o be s h i f t i n g t o t h e west, i n f l u e n c e d i n p a r t . no doubt, by t h e drought encountered l a s t year throughout p a r t o f t h e p r a i r i e p rov inces .

A l l i n a l l , we a r e concerned about t h e s t a t u s of our farm loan p o r t - f o l i o , as indeed we shou ld be. We've seen our ac tua l loan losses move f rom 1/8 percen t o f 1 pe rcen t t o over a f u l l percent d u r i n g t h e p a s t

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severa l years. We've seen our nonproduc t i ve loans and loan del inquency f i g u r e s move t o new h ghs for r e c e n t t imes. B u t when a l l i s s a i d and done, our exper ience w t h t h e farm loan p o r t f o l i o s t i l l compares favo ra - b l y w i t h most o f our o her l oan p o r t f o l i o s w i t h i n the bank. We do have a hard c o r e o f problem fa rm accounts and f o r these people, t he problem i s ve ry r e a l and v e r y s e r i o u s . B u t we a l s o have a v e r y l a r g e percentage o f our c l i e n t s , w e l l i n excess o f 90 p e r c e n t , who appear t o be cop ing w i t h t h e i r c r e d i t problems r a t h e r w e l l under t h e c i rcumstances. even though they a r e undoubtedly f e e l i n g the p inch o f these tough economic t imes. Farm f i n a n c e i s and shou ld be v e r y much a p o i n t of concern. I t should n o t be viewed as a c r i s i s a t t h i s t ime, however, nor shou ld i t be approached as such i n terms of i n t r o d u c i n g any undue and p r e c i p i t o u s farm debt l e g i s l a t i o n .

Dealing With the Problems i n the Short Run - Tools, a t i v e Solutions

Techniques and Cre-

When a banker l ooks a t a farm i n s e r i o u s f i n a n c i a l t r o u b l e , he prob- a b l y t h i n k s i n terms o f two main courses o f a c t i o n . F i r s t , what s teps can be taken t o t u r n the o p e r a t i o n around and r e s t o r e p r o f i t a b i l i t y . Second, i f a tu rna round i s n ' t p o s s i b l e . how can the lender buy more t ime t o ensure t h a t t h e asse ts a r e d i sposed o f a t t h e b e s t p o s s i b l e p r i c e - - h o p e f u l l y a t a l e v e l wh ich w i l l recover o u t s t a n d i n g loans and leave a r e s i d u a l payout f o r t he borrower .

L e t ' s look f i r s t a t t h e o p t i o n s a v a i l a b l e t o a bank f o r purposes o f t r y i n g t o t u r n around a f i n a n c i a l l y t r o u b l e d farm. S i x o p t i o n s come t o mind:

1 . Debt C o n s o l i d a t i o n and Ex tens ion o f Loan Terms

I would say t h a t i f t h e o n l y s t e p r e q u i r e d t o s o l v e a farm f i - n a n c i a l problem was t o c o n s o l i d a t e debts over a longer t ime p e r i - od, t hen t h e r e i s r e a l l y no problem. V i r t u a l l y a l l l enders have the c a p a b i l i t y t o do j u s t t h a t and i f t h i s s t e p w i l l s o l v e the problem, i t has p robab ly a l r e a d y been taken. Indeed, many o f our c u r r e n t problem l o a n accounts have a l r e a d y gone through the deb t c o n s o l i d a t i o n e x e r c i s e and we now f i n d l i t t l e o r no scope f o r f u r t h e r a s s i s t a n c e i n t h i s regard. To be sure. t h e r e a r e those who suggest t h a t t he answer i s a 40-year repayment term where perhaps a 25-year term now e x i s t s . But anyone who i s f a m i l i a r w i t h a m o r t i z a t i o n schedules a t c u r r e n t i n t e r e s t r a t e s w i l l know t h a t t h i s o p t i o n s imp ly extends t h e b o r r o w e r ' s agony w i t h o u t any a p p r e c i a b l e r e d u c t i o n i n t h e annual deb t repayments r e q u i r e d .

2 . I n t e r e s t / P r i n c i p a l Deferment

Shor t - te rm repayment crunches can o f t e n be met by d e f e r r i n g i n t e r e s t o r p r i n c i p a l payments, t hus t e m p o r a r i l y buy ing 5 m e ad- d i t i o n a l b r e a t h i n g t ime. Overdue i n t e r e s t can a l s o be c a p i t a l - i z e d back i n t o p r i n c i p a l and repayments r e s t r u c t u r e d a c c o r d i n g l y . But by and l a r g e , most l enders a r e prepared t o e x e r c i s e t h i s op- t i o n whenever i t makes any s o r t o f sense.

9 3 . Use o f i n t e r e s t t oncess ion Programs

E a r l i e r , I mentioned t h a t o p t i o n s such as t h e S.B.B. and S.B.D.B. programs can enable a s u b s t a n t i a l l y lower i n t e r e s t r a t e t o be passed on t o t h e borrower. T h i s o p t i o n was e s p e c i a l l y use- f u l d u r i n g r e c e n t p e r i o d s o f v e r y h i g h i n t e r e s t r a t e s . U n f o r t u - n a t e l y , most o f t h e banks have now l a r g e l y exhausted t h e i r near term c a p a c i t y t o make s i g n i f i c a n t new advances under these s o r t s o f programs. There i s s t i l l some money a v a i l a b l e , b u t n o t l i k e l y i n the amounts t h a t would be p a r t i c u l a r l y h e l p f u l t o t h e i n d u s t r y a t l a r g e .

4. Loan Write-downs

I f t he re i s one lesson t h a t banks have learned i n r e c e n t t imes, i t ' s t h a t an enforced fa rm wind-down i n v a r i a b l y r e s u l t s i n s i g n i f i c a n t losses t o t h e lender and probably a t o t a l loss t o t h e borrower. The argument i s f r e q u e n t l y advanced t h a t i n v iew o f t h i s f a c t , why d o n ' t l enders s imp ly w r i t e o f f a p o r t i o n o f t h e l oan and a l l o w the borrower t o con t inue . I would suggest t h a t t h e r e a r e seve ra l reasons why t h i s w o n ' t work. F i r s t , when an o p e r a t i o n i s c l o s e d down, t h e r e w i l l o f t e n be l oan losses: b u t t h e r e w i l l a l s o be a s i g n i f i c a n t recovery o f l oan funds a v a i l a b l e f o r use elsewhere. W r i t i n g o f f a p o r t i o n o f t h e loans and a l l o w - i n g t h e o p e r a t i o n t o con t inue i s e f f e c t i v e l y p l a c i n g t h e remain- i n g loan funds a t r i s k as w e l l . Second, j u s t w r i t i n g o f f a p o r - t i o n o f t he loans i s i n v a r i a b l y o n l y p a r t o f t h e answer. S t i l l more l oan funds w i l l be r e q u i r e d i f t h e o p e r a t i o n i s t o con t inue . Who w i l l p r o v i d e those funds knowing t h a t t h e p resen t lender has a l r e a d y taken a write-down? T h i r d , w r i t i n g down loans i s n ' t t h a t s imp le s i n c e w e ' r e e s s e n t i a l l y t a l k i n g about loans t h a t were made p o s s i b l e by funds p laced w i t h the bank by d e p o s i t o r s . I t s h o u l d n ' t be any s u r p r i s e t o n o t e t h a t these d e p o s i t o r s w i l l c e r - t a i n l y expect t o ge t t h e i r d e p o s i t s back--wi th i n t e r e s t and w i t h - o u t de lay . And f i n a l l y , one has to ques t i on the r a t i o n a l e o f an economic system t h a t awards f a i l u r e and pena l i zes success. What m igh t be the a t t i t u d e o f t he farmer who meets h i s o b l i g a t i o n s i n f u l l o n l y t o suddenly f i n d h i m s e l f i n c o m p e t i t i o n w i t h a neighbor who has had t h e b e n e f i t o f a mandatory debt r e d u c t i o n ? And what w i l l t h a t do f o r c o n t r a c t u a l r e l a t

Having s a i d a l Royal, we do have designed p r i m a r i l f o r b e t t e r market

t he f u t u r e o f t he ' t r a d i t i o n a l lender /borrower onship.

o f t h i s , I would l i k e t o p o i n t o u t t h a t i n t h e p r o v i s i o n f o r a debt se t -as ide . T h i s o p t i o n is

t o buy t ime f o r e i t h e r a f u t u r e recovery o r c i rcumstances under which t o wind up t h e opera-

t i o n . Q u i t e f r a n k l y , we o n l y e x e r c i s e t h i s o p t i o n where the im- mediate a l t e r n a t i v e i s t o wind up the o p e r a t i o n and take a sub- s t a n t i a l loss. When e l e c t i n g t o do a loan set -as ide, we u s u a l l y agree t o s e t o n l y t h a t p o r t i o n o f t he loan which would p robab ly be l o s t on an immediate l i q u i d a t i o n . The i n t e r e s t c l o c k i s stopped on t h e p o r t i o n of t h e l oan s e t as ide f o r an'agreed p e r i o d o f t ime. I f t h e farm o p e r a t i o n can be turned around, w e ' l l r e -

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s t a r t t h e i n t e r e s t c l o c k a t some f u t u r e d a t e and reschedu le t h e loan se t -as ide back i n t o r e g u l a r repayment. I f t h e o p e r a t i o n f a i l s , t hen i t ' s a m a t t e r of w i n d i n g i t down and a c c e p t i n g what w i l l l i k e l y be an even l a r g e r loss a t t h a t t ime . I n my o p i n i o n , t h i s i s an o p t i o n w i t h r e l a t i v e l y l i t t l e p o t e n t i a l , but i f i t w i l l h e l p improve t h e chances f o r a f u t u r e recovery, w e ' r e w i l l - i ng t o f l y w i t h i t - -assuming t h a t we f e e l t h e on-farm management i s equal t o t h e task ahead. I f t h a t i s n ' t t he case, t hen t h e r e i s l i t t l e t o be gained by any such arrangement.

5. Upgraded Management Suppor t

You c e r t a i n l y c a n ' t t a r eve ry f i n a n c i a l l y t r o u b l e d farm w i t h gross mismanagement. Lady luck dea ls many o f those cards as w e l l ! But t h e r e i s enough ev idence t o suggest t h a t a good many o f t o d a y ' s farm f a i l u r e s c o u l d have been avoided w i t h b e t t e r f i - n a n c i a l management s k i l l s . Wh i le i t may be too l a t e f o r t he farms t h a t have a l ready f a i l e d , t h e r e i s much t h a t can be done t o ensure a l ower ing o f t h e f u t u r e farm f a i l u r e r a t e caused by f i - n a n c i a l mismanagement. Most banks r e a l i z e the need t o upgrade f i n a n c i a l management suppor t s e r v i c e s f o r t h e farm s e c t o r . The Royal i s making s i g n i f i c a n t s t r i d e s i n t h i s d i r e c t i o n . I n sup- p o r t o f t h a t s ta tement , l e t me c i t e some o f t he i n i t i a t i v e s t h a t a r e now b e i n g taken by t h i s bank:

A l a r g e and growing s t a f f of a g r o l o g i s t s , w i t h s p e c i a l academ- i c backgrounding i n a g r i c u l t u r a l economics and/or bus iness management t r a i n i n g .

In-house s t a f f t r a i n i n g programs t o meet t h e farm l e n d i n g needs of t he l end ing o f f i c e r .

C l i e n t c r e d i t s h o r t courses t o b e t t e r equ ip bo r row ing c l i e n t s t o s u c c e s s f u l l y manage t h e i r f i n a n c i a l o p e r a t i o n s .

I n t r o d u c t i o n o f microcomputers and farm p l a n n i n g and a n a l y s i s so f tware f o r use by a l l o f our a g r o l o g i s t s and by a growing number o f our branches.

P r o v i s i o n f o r c l i e n t s o f t w a r e programs t o f a c i l i t a t e farm pl anni ng.

Redesign o f a s p e c i a l check accoun t ing program c u r r e n t l y a v a i l a b l e t o a l l farm c l i e n t s . T h i s s e r v i c e now o f f e r s a month ly l oan m o n i t o r i n g f a c i l i t y a g a i n s t p lan. As w e l l , i t w i l l i n c o r p o r a t e d i r e c t f a rm p l a n n i n g c a p a b i l i t i e s i n the near f u t u r e .

S p e c i a l i z e d f i n a n c i a l p l a n n i n g forms and r e l a t e d user docu- ments for use by c l i e n t s .

Video c a s s e t t programs t o b e t t e r acqua in t c l i e n t s w i t h l e n d i n g o p t i o n s and techniques.

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There has been a l o t done i n r e c e n t yea rs t o address t h e f i n a n c i a l management needs o f farmers. There i s a l o t more t h a t s t i l l needs t o be done. The resources o f a l l o f us i n t h e room today w i l l be taxed t o t h e l i m i t i n meet ing these needs i n t h e f u t u r e . Indeed, i f t h e r e i s one s i n g l e answer f o r t h e f u t u r e , i t i s not l i k e l y t o be any s i n g l e l end ing t o o l or techn ique- - i t w i l l s imp ly b e a b e t t e r knowledge base on b e h a l f o f farmers seeking t o use c r e d i t f o r t h e i r f u t u r e advantage.

E a r l i e r , I suggested t h a t l enders today tend t o look f i r s t a t a po- t e n t i a l economic recovery o f t h e fa rm o p e r a t i o n and secondly, a t those o p t i o n s a v a i l a b l e t o y i e l d t h e b e s t t o t a l l o a n r e t r i e v a l i f t h e opera- t i o n subsequently f a i l s and must be l i q u i d a t e d . Again, t h e r e a r e a num- be r o f a v a i l a b l e o p t i o n s t o make t h e bes t o f a farm windup. A l l o f these o p t i o n s have one s p e c i f i c o b j e c t i v e i n mind--to buy a d d i t i o n a l t i m e f o r an o r d e r l y d i s p o s a l o f asse ts a t t h e bes t p o s s i b l e p r i c e s . Un- f o r t u n a t e l y , t h a t o p t i o n u s u a l l y o n l y works w i t h the f u l l co -opera t i on o f t he borrower . Where t h i s co -opera t i on e x i s t s , t hen t h e f o l l o w i n g op- t i o n s a r e a v a i l a b l e :

1 . Lease Opt ion

Demand f o r farm land i s n ' t e x a c t l y spec tacu la r these days and as a r e s u l t , f o rced s a l e s tend t o b r i n g r a t h e r bad ly d iscounted values. I n o rde r t o g e t around t h a t , many banks a r e now h o l d i n g l and on a q u i t c l a i m b a s i s and a re r e n t i n g these p r o p e r t i e s u n t i l t h e market improves t o the p o i n t where the land can be s o l d w i t h - o u t e i t h e r accep t ing a d i s t r e s s p r i c e o r c r e a t i n g f u r t h e r pres- sures on o the r land a v a i l a b l e f o r s a l e i n the area. Un fo r tuna te - l y , t h i s o p t i o n w i l l u l t i m a t e l y run i n t o c o n f l i c t w i t h severa l p r o v i n c i a l j u r i s d i c t i o n s which l i m i t t he t ime p e r i o d i n which a bank may h o l d farm p r o p e r t y . We're hoping t h a t e i t h e r t h e market improves p r i o r t o t h e d a t e o f f o r c e d s a l e o r an ex tens ion i s for thcoming g i v e n t h e c u r r e n t circumstances. I n respec t t o the lease op t i ons , I would a l s o l i k e t o p o i n t o u t t h a t should t h e land u l t i m a t e l y s e l l for more than t h e debt charges accumulated a g a i n s t i t , t h e bank w i l l r e t u r n any n e t r e t u r n s t o t h e o r i g i n a l borrower. I n s h o r t , our l and l e a s i n g program i s s imply designed t o p reven t t h e f u r t h e r c o l l a p s e i n land va lues t h a t might w e l l t ake p lace i f a l l l enders unloaded farm p r o p e r t i e s c u r r e n t l y be- i ng he ld . l t i s n o t des igned t o generate r e a l e s t a t e p r o f i t s f o r t he bank.

2. P r o v i s i o n f o r Orde r l y L i q u i d a t i o n by Operator

Where a windup appears i n e v i t a b l e , the n e t r e s u l t s can f r e - q u e n t l y be much b e t t e r i f t h e c u r r e n t ope ra to r p e r s o n a l l y ar rang- es f o r t h e l i q u i d a t i o n over t ime. Frequent ly . t h i s means t h a t t h e lenders w i l l have t o p r o v i d e t r a n s i t i o n a l f und ing t o assure t h a t t he necessary t ime f o r l i q u i d a t i o n i s a v a i l a b l e . Host lend- e r s a r e more than w i l l i n g t o work o u t mu tua l l y agreeable arrange- ments i f the c l i e n t i s co -opera t i ve and r e t a i n s the f u l l c o n f i - dence o f t h e lender throughout .

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3 . P a r t i a l L i q u i d a t i o n by Operator

P a r t i a l l i q u i d a t i o n s and a r e s t r u c t u r i n g o f rema in ing loans i s an o p t i o n t h a t may w e l l be v i a b l e - - p a r t i c u l a r l y i f the ongoing losses a r e checked i n t ime. U n f o r t u n a t e l y , p a r t i a l l i q u i d a t i o n o f asse ts i s n ' t always p r a c t i c a l where t h e i n d u s t r y as a whole i s i n a ret renchment mode. Again, i t ' s an o p t i o n t h a t may be u s e f u l as an a l t e r n a t i v e t o a f u l l s c a l e wind-down.

4. L i q u i d a t i o n by Cour t Appointed Rece ive rs

Th is i s p robab ly the w o r s t a l t e r n a t i v e open t o a lender , and y e t i s f r e q u e n t l y the one which i s most o f t e n c a l l e d i n t o use. I t i s n o t t h a t t h e r e c e i v e r s a r e incompetent. but s imp ly t h a t they must ope ra te i n an env i ronment over which they have l i t t l e c o n t r o l . Once a r e c e i v e r i s appointed. t h e news becomes p u b l i c and the asse ts o f t h e fa rm a r e v e r y much a t t h e mercy o f b a r g a i n hun te rs . There i s , i n f a c t , l i t t l e o p p o r t u n i t y a t t h i s t ime t o s y s t e m a t i c a l l y market a p r o d u c t now known t o be i n the hands o f a r e c e i v e r , p a r t i c u l a r l y where t h a t p r o d u c t i s p e r i s h a b l e i n na- t u r e . A l l t o o o f t e n , an unco -opera t i ve borrower makes t h e task t h a t much more d i f f i c u l t by h i d i n g asse ts and g e n e r a l l y p u t t i n g o b s t a c l e s i n the p a t h of t h e r e c e i v e r . U n f o r t u n a t e l y , when t h i s haDDenS. t h e borrower e i t h e r f i n d s h i m s e l f s t i l l l i a b l e f o r un- . . - p a i d loans o r i f i n d s h i m s e l f some P o r t i o n of

n many ins tances , a t h i r d p a r t y gua ran to r sud hav ing t o make good on h i s guarantee f o r a

' t he s h o r t f a l l .

Dealing With the Problem in the Long Run

There a r e c e r t a i n l y s h o r t r u n s o l u t i o n s which can and should be I i z e d tn meet c u r r e n t c r e d i t problem cases. But the re a r e a l s o a 3f o p t i o n s a v a i l a b l e t o h e l p meet the longer r u n cha l l enge . Cons f o r i ns tance , t he f o l l o w i n g suggest ions:

1 . Upgraded Hanagement Capabi 1 i t i e s - Borrowers and Lenders

Host lenders a r e now a t t e m p t i n g t o address the i ssue o f c

e n l y 1 o r

u t i - hos t der ,

i e n t f i nanc i a 1 management capab i 1 i t i es- So a r e a number o f government and u n i v e r s i t y e x t e n s i o n agencies, i n c l u d i n g government c r e d i t agencies. B u t t h e problem i s l a r g e r than each of us can hand le w i t h i n our r e s p e c t i v e shops. We need t o i n t e g r a t e our e f f o r t s i f t h e b i g g e s t impact i s t o b e made on t h e f u t u r e management capa- b i l i t i e s of borrowers and lenders a l i k e . A few suggest ions:

I t ' s my obse rva t most u n i v e r s i t y farm c r e d i t as a sary s t a f f resou s t a r t by way o f en te r i ng the j o b

on t h a t v e r y l i t t l e has been done t o d a t e a t a g r i c u l t u r a l c o l l e g e s by way o f i n t r o d u c i n g key c u r r i c u l u m item, complete w i t h the neces- ces. Yet t h i s i s where i t shou ld l o g i c a l l y t r a i n i n g new p o t e n t i a l a g r i c u l t u r a l l enders stream.

Government e x t e n s i o n s e r v i c e s d o n ' t seem t o have much more i n t h e area o f c r e d i t a n a l y s i s and c r e d i t ex tens ion programs than when I worked i n t h i s area some 20 odd years ago. Yet i n t h e meantime, t h e need has grown v e r y s i g n i f i c a n t l y as have the t o o l s ( i .e., microcomputers) w i t h which t o do t h e j o b . I n my o p i n i o n , a l a r g e r s t a f f complement o f c r e d i t o r i e n t e d exten- s i o n workers can do much t o h e l p b r i d g e t h e i n f o r m a t i o n gap a t t h e farm l e v e l . I m i g h t a l s o say t h a t t h i s pool o f t r a i n e d personnel a l s o serves r a t h e r w e l l from t ime t o t ime i n meet ing the needs f o r a d d i t i o n a l a g r o l o g i s t s by banks and c r e d i t un- ions.

Hicrocomputer so f tware f a c i l i t i e s have tended t o cover the wa- t e r f r o n t t o d a t e w i t h probably as much con fus ion as the re a r e program o p t i o n s . Now t h a t we seem t o be w i t n e s s i n g a l e v e l - l i n g o u t o f hardware o p t i o n s , perhaps w e ' l l a l s o see a r a t i o n - a l i z a t i o n o f a v a i l a b l e sof tware. I n our own shop, we've j u s t commissioned a new so f tware program t o meet our own needs and t h e needs o f our c l i e n t s w i t h respec t t o f i n a n c i a l p lanning. Even then, w e ' r e j u s t s c r a t c h i n g t h e sur face.

2. C r e a t i o n o f a F i n a n c i a l Sa fe ty Net

Not a l l farms now i n t r o u b l e can be saved. Nor should they n e c e s s a r i l y be saved i f t h e r e q u i r e d management e x p e r t i s e i s l a c k i n g . But do we have the s o r t o f s a f e t y n e t t h a t can h e l p those farmers who a r e i n severe f i n a n c i a l t r o u b l e because o f events n o t o f t h e i r own making? We've t a l k e d a l o t about farm rev iew boards but n o t h i n g much p o s i t i v e has happened t o date. U n f o r t u n a t e l y , t h e p r e v a i l i n g sugges t ion c u r r e n t l y seems t o be t h a t these boards w i l l f i n d an escape ha tch f o r a l l farm a p p l i - can ts - -usua l l y through t h e expediency o f an a r b i t r a r y loan w r i t e - down. I n my o p i n i o n . what we r e a l l y need a r e boards t h a t can e f - f e c t i v e l y assess management c a p a b i l i t i e s of a p p l i c a n t s and then p r o v i d e l oan guarantees t o lenders w i l l i n g t o go t h e e x t r a m i l e where t h e added r i s k would o the rw ise suggest a wi thdrawal o f sup- p o r t . J u s t accep t ing t h e f a c t t h a t n o t a l l farmers a r e capable o f s u c c e s s f u l l y o p e r a t i n g a farm would be a u s e f u l s t a r t i n farm rev iew board ph i l osophy .

3 . Income S t a b i l i z a t i o n

The farm i n d u s t r y b a d l y needs an income s t a b i l i z a t i o n program which w i l l smooth o u t t h e rough edges o f t h e p r i c e / p r o d u c t i o n c y - c l e , perhaps u s i n g t a x i n c e n t i v e s t o encourage farmer p a r t i c i p a - t i o n . Judging f rom r e c e n t t r a d e d i scuss ions , these programs should s t u d i o u s l y avo id d i r e c t government subs id ies t h a t m igh t l ead t o t h e s o r t o f a l l e g a t i o n s now a t hand w i t h respec t t o Cana- da/Uni ted S t a t e s t r a d e i n hogs and pork products . Tak ing the sharp edges o f f year t o year swings i n farm income w i l l a l s o do much t o enhance longer run s t a b i l i t y i n new farm investments- - to say n o t h i n g o f new loan a v a i l a b i l i t y .

4 . Fewer T ransg ress ions i n t h e H i s t o r i c a l Borrower/Lender Contractu- a l Arrangements

No th ing can q u i t e so e f f e c t i v e l y d r y up f u t u r e s u p p l i e s o f farm loans than t h e p e r c e p t i o n by t h e l ender t h a t he w i l l no longer have a f u l l measure o f c o n t r o l over h i s loan p o r t f o l i o . Yet t h i s i s p r e c i s e l y what happens when governments i n t r o d u c e debt morator ium l e g i s l a t i o n , or worse s t i l l , propose l e g i s l a t i o n which w i l l have the e f f e c t o f a r b i t r a r i l y w r i t i n g down loans. We've been through t h a t exper ience a h a l f a c e n t u r y ago and i t took a good p a r t o f t h e i n t e r v e n i n g p e r i o d t o b r i n g t h e p r i v a t e sec to r back i n t o farm lend ing . Su re l y we d o n ' t need t o make t h a t m is take aga in .

5. Hore Emphasis on Comparative Economic Advantage

I would argue t h a t many o f t h e farm income and t r a d e problems t h a t w e ' r e l o o k i n g a t today a r e a d i r e c t consequence o f p r o v i n - c i a l governments a t t e m p t i n g t o ca rve o u t a farm p r o d u c t i o n base where l i t t l e o r no comparat ive economic advantage e x i s t s . I n t r o - duce the f u r t h e r SpeCKre o f i n t e r p r o v i n c i a l c o m p e t i t i o n between t r e a s u r i e s and you have the makings f o r an economic f o u l - u p o f c o l o s s a l p r o p o r t i o n s . Today ' s c r e d i t programs used i n t h i s type o f environment a l l too o f t e n r e s u l t i n tomorrow's b a n k r u p t c i e s .

6 . i n t r o d u c t i o n o f E q u i t y F inanc ing

One o p t i o n t h a t a lender sometimes has i s t o c o n v e r t loans t o e q u i t y and u l t i m a t e l y hope t o recoup t h e l oan funds from the eq- u i t y p a r t i c i p a t i o n . I t ' s a process t h a t has been used f a i r l y f r e q u e n t l y i n r e c e n t t imes w i t h respec t t o l a r g e p u b l i c l y t raded c o r p o r a t i o n s where debt p r e s s u r e has l e f t no o t h e r a l t e r n a t i v e s h o r t of l i q u i d a t i o n . There may be grounds f o r e x p l o r i n g t h i s concept f u r t h e r a t t h e i n c o r p o r a t e d farm l e v e l . We've looked a t i t but a t t h e moment have e l e c t e d t o s t a y c l e a r of t h i s process. There a r e problems assoc ia ted w i t h a d d i t i o n a l t h i r d p a r t y lenders and we doubt t h a t t h i s process would work w i t h p r i v a t e l y h e l d c o r p o r a t i o n s . Nonetheless, t h e r e may w e l l be f u r t h e r o p t i o n s i n e q u i t y f i n a n c i n g t h a t can meet t h e needs o f t he farm c o r p o r a t i o n w i t h o u t i n v i t i n g t h e c u r r e n t problems. The concept deserves f u r - t he r s tudy !

7 . Government Land Ownership

I f economic c o n d i t i o n s c o n t i n u e t o d e t e r i o r a t e and more and more farmers a r e pushed t o t h e w a l l , what w i l l happen t o l and va lues? I t h i n k t h a t most o f us would agree t h a t under these c o n d i t i o n s o f g r e a t supply and l i m i t e d demand, l and p r i c e s would take an even more se r ious b e a t i n g . What about p o s s i b l e govern- ment i n t e r v e n t i o n by way o f s h o r t term land ownership des igned t o buy a t l e a s t some o f the l and and lease i t back t o perhaps the p resen t owners? That i s a p o l i t i c a l h o t p o t a t o i n most j u r i s d i c - t i o n s . b u t i f w e ' r e l o o k i n g a t a l l f u t u r e o p t i o n s , why n o t rev iew t h i s concept as w e l l ?

A t t h i s point I would l i k e t o s t ress once more tha t wh i l e our farm f i n a n c i a l problems i n some regions are severe, I ' m extremely r e l u c t a n t t o use the word "c r i s i s . " I say t h a t because too o f ten the use o f t h a t word conjures up h a l f baked and i l l - conce ived so lu t i ons t h a t t u r n ou t t o be much worse than the o r i g i n a l problem. There i s much tha t can be done and i s being done a t the present time. Farmers as a group are f a r more adaptive than most people g i ve them c r e d i t f o r and much adjustment has already taken place. Jus t ask your l oca l machinery agency i f you doubt tha t statement. The c r i t i c a l issue t h a t we must address i s s imply whether o r no t soc ie ty i s w i l l i n g t o see an outward migra t ion from farm- ing on a scale tha t i s now indicated. The economic system by i t s e l f w i l l almost c e r t a i n l y see t ha t t h i s t r a n s i t i o n takes p lace- -a l l a t a leve l t h a t i s much higher than would o r d i n a r i l y be expected i n view o f the v i r t u a l lack o f f a i l u r e s dur ing the i n f l a t i o n a r y era o f the 70s. Through jud i c ious use o f farm review boards and at tendent government guarantee programs, t h i s loss can be p a r t i a l l y minimized and many o f the b e t t e r management o r i en ted operators maintained f o r one more chance. In t roduc t ion o f debt write-dcun l e g i s l a t i o n and debt moratoriums can a l so buy add i t iona l t ime f o r v i r u t a l l y a l l farmers now i n f i n a n c i a l t roub le - -a lbe i t a t the cost o f a v i a b l e p r i v a t e sector loan program i n the fu tu re . These issues are rea l and the consequences are wide rang- ing. I comnend the CAEFNS f o r p u t t i n g the issue on debate. The more we know about the imp l ica t ions o f each a v a i l a b l e opt ion, the b e t t e r our a b i l i t y t o he lp ensure the f u t u r e o f the farm industry.