Financial crisis hikes farmers’ costs, but ag remains strong
By Farmers’ Advance
Tuesday, October 28, 2008 3:49 PM CDT
How has the nation’s credit crisis impacted how ranchers do business?
The current financial crisis gripping the United States could moderate global and domestic demand for U.S. farm products and intensify an already volatile price situation for both commodities and the supplies that farmers must purchase, according to a financial analysis by the American Farm Bureau Federation. Overall, however, the nation’s agricultural balance sheet is strong, although the situation is variable among individual farmers and changing credit conditions will impact the agricultural landscape.
"The fallout from the general financial malaise is being felt worldwide, especially in countries that may be already facing slowing economies due to the high price of energy," said AFBF economist Terry Francl.
"This will most likely moderate the demand for agriculture products and ingredients, reduce the demand for U.S. agricultural exports and, ultimately, affect U.S. farm prices.
"Likewise, a slower domestic economy would also weigh on the demand for farm commodities and prices."
In addition, there is now waning interest for new investment in commodity markets, said AFBF economist Jim Sartwelle.
"Folks out there in the investment world have pulled their claws back in a little bit. It’s taken money out of the commodity market and lowered commodity prices some. We’ve seen the prices of almost all our crop and livestock deals go down," he said.
Oil prices that continue to creep up over $100 a barrel only add fuel to the fire, as most farm inputs are petroleum products or petroleum-based.
"That is going to have an effect on the margins ... for crops and livestock both," Sartwelle said.
The crisis is also impacting how far farmers can extend themselves financially because the cost of credit has risen as the credit supply has been impaired.
"We are very reliant across agriculture on lines of credit because we only sell our products once a year," said Sartwelle of farmers borrowing money each year to, for instance, buy seed and get their crops in the ground in the spring.
"Unlike the rest of the economy, though, agriculture ... manages to clear its books at the end of the year," he said. "In agriculture, we’ve been very responsible. Coming out of the ag credit crisis of the ‘80s, we’ve taken our debt-to-asset ratios in agriculture down to numbers that we’ve never seen before."
Currently, the farm debt-to-asset ratio is at a modern low of 10 percent, thanks in part to projected record-high farm income in 2008. Still, like the rest of the country, farmers can expect tighter credit with much stricter conditions, say the AFBF economists.
The crunch is already affecting some agribusiness companies, as reflected by recent developments in the fertilizer sector, Francl said.
"Fertilizer prices have basically doubled in the past two years and continue to rise," Francl said.
"Farmers are currently being asked to make commitments for their 2009 fertilizer needs and to pay a substantial portion of that commitment, sometimes 100 percent up front. The credit function of these transactions is being shifted from the fertilizer producers and retail dealers to the farmers. The net result is that it increases the farmer’s cost."
Spillover effects can also be found in farmers’ commodity sales to elevators and processors. In some situations, farmers are not being asked to provide more credit, but are being offered a lower price for their crops, generally due to the higher "basis," which is the difference between the futures price and the local cash price.
"The net impact of either the higher cost or lower prices is the same -- less income for farmers," Francl explained. "There are many factors other than just credit availability affecting the returns to U.S. agriculture, but the current financial instability simply serves to exacerbate the already volatile input/output price situation."
AFBF supported passage of the federal rescue package but emphasized that a number of closely related issues must also be dealt with.
"Regulations and oversight must be put in place that will ensure this problem does not happen again, so that the nation is not taken to the brink by the actions of a few or by policies that fail to meet any kind of accounting or economic reasonableness test," said AFBF President Bob Stallman.
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