Editor’s note: The following is an excerpt from the article, "The agricultural credit situation," by Danny Klinefelter, professor and extension Economist with Texas AgriLifeExtension, Texas A&M University. Download the entire article here.

Serious problems that developed in the agricultural credit situation in 2009 could escalate in 2010–2011.

The earliest problems have occurred for lenders with loan concentrations in beef, dairy, hogs and poultry. Producers in all the protein sectors have suffered significant losses for over a year, resulting in a large increase in non-performing loans. Although there were few foreclosures in 2009, without a significant turnaround in income, many dairy and hog loans are in a near crisis situation. Many producers have lost enough equity that their lenders will be forced to discontinue financing.

The impact on the agricultural sector will be magnified by the fact that many dairy and hog operations represent the majority of the assets for many producers. If the livestock operation fails, all of the assets of the business will have to be liquidated, including the land base. In addition, most of the more successful dairy operations are not in a position where their lender will allow them the leverage up to purchase the assets of the operations that are liquidating, even at a significant discount. While dairies tend to fail as individual businesses, many hog operations are contractually part of integrated supply chains. Some very well managed hog operations are going to be liquidated not just because of their own performance, but because their integrator fails and the entire supply chain goes down with him.

Crop producers have fared fairly well over the past several years, but many grain producers are likely to have carryover operating debt if they purchased inputs early in the year when inputs were high and then had a poor crop or forward priced their crop after prices declined. Fortunately, most grain producers experienced a run of several years of above-normal income and pushed cash forward into 2009 for tax reasons. Now, however, margins going forward appear to be returning to normal levels.

An increase in the federal biofuels standard world provide a temporary benefit to grain producers, but it would further exacerbate the financial problems of livestock producers.

Some borrowers will be able to restructure their loans using guarantees from USDA’s Farm Service Agency (FSA), but even this lender of last resort will require that borrowers demonstrate the ability to service the loan. Also, many confinement livestock operations have credit needs that far exceed FSA’s limits.

Read more here.