A significant example is the bankruptcy filing of Pilgrim’s Pride, the nation’s largest chicken producer.Īgriculture is generally characterized as using a low amount of debt relative to assets. Continued low profit margins have increased the credit risks for these sectors.
These producers entered 2008 in more stressful liquidity and leverage positions. The major stress sectors in agriculture are the protein markets, especially pork and poultry. However, net farm income is projected to be 20% lower in 2009.
farms in 2008 was a record $89.3 billion. In general, the financial condition of farm borrowers was strong entering 2008. In summary, though some easing of the credit conditions is evident, there is substantial credit and liquidity risk in the markets. However, the CDS spreads were below 100 basis points prior to the crisis. financial stocks have declined to 300 basis points from 500 basis points in October 2008. Credit default swap (CDS) spreads, a measure of the price of risk, for high grade U.S. General economic and systemic risks to financial institutions remain high. As shown in Figure 1, the spreads peaked in late 2008 at near 3.5% and have dropped slightly to 2.9% during the first week of February 2009 (Federal Reserve Bank of St. As spreads increase, the cost of borrowing and credit risk also increase. The AAA-BAA corporate spread is a useful indicator for the price of credit risk. LIBOR rates increased slightly in mid-March 2009, reflecting the fact that considerable uncertainty in the market remains. By mid-February 2009 the rate had dropped to approximately 100 basis points, high by historic standards, but substantially lower than its peak. It increased to 365 basis points after the Lehman failure on Oct. Historically, the LIBOR-OIS spread was about 10 basis points. In stressful times, LIBOR reflects credit and liquidity risk and thus, the spread is used as a summary indicator of credit market conditions. It is the difference between the three-month (or one-month) London Interbank Offered Rate (LIBOR) and the overnight indexed swap (OIS) rate. The LIBOR-OIS spread is used as a barometer of stress and illiquidity in the money markets. Three indicators that provide information are (1) LIBOR-OIS spread, (2) AAA-BAA corporate bonds spreads, and (3) credit default swap (CDS) spreads for U.S. A wide range of indicators are often used to measure the liquidity risk and the willingness to lend among financial institutions. There is some evidence that credit markets have eased moderately since November 2008. In an attempt to fill the gap in credit availability, the Federal Reserve has undertaken a variety of lending programs, resulting in a doubling of its balance sheet between Aug. Over the past 12 months, the number of unemployed has increased by about 5.0 million and the unemployment rate has risen 3.3 percentage points to 8.1%. originated credit assets to $2.2 trillion (IMF 2009). Financial system write downs and credit losses have exceeded $1 trillion, and the International Monetary Fund (IMF) has raised its estimate of the potential deterioration in U.S. The delinquency rate for mortgage loans on one-to-four-unit residential properties rose to a seasonally adjusted rate of 7.88% of all loans outstanding as of the end of the fourth quarter of 2008, up 2.06% from one year ago (Mortgage Bankers Association, 2009). The macroeconomic news continues to top the headlines and reveal the dimensions of the turmoil in credit markets. This article provides a summary of some of the financial indicators useful in measuring the extent of the credit crisis and an overview of the current and potential impacts on agriculture.
Agriculture and institutions lending to agriculture have not been immune to the impacts of the financial crisis. This financial turmoil and economic disruption in the financial markets is clearly unprecedented. Moreover, due to the interconnectedness among the major global financial institutions, the crisis spread worldwide. The economic feedback loops resulting from the economic slowdown and job losses are certainly impacting the confidence of consumers and the stability of the financial services sector. Because banks and other financial intermediaries are critical conduits for economic investment and growth, the crisis quickly migrated to individuals, small businesses and large firms. The initial declines in housing prices and subprime delinquencies spilled into the financial markets. The economic fallout of the financial crisis has widely and deeply impacted most economic sectors.
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