The end of cheap money for US farmers creates problems for food production

CHICAGO, Nov 22 (Reuters) – Montana farmer Sarah Degn had big plans to invest the good profits she reaped this year on her soybeans and wheat in upgrading her planter or buying a new one. storage container.

But those plans went by the wayside. Everything Degn needs to farm is more expensive, and for the first time in her five-year career, so is the interest rate on the short-term debt she and nearly every other U.S. farmer relies on to pay. grow their crops and raise their livestock.

“We may have made more money this year, but we spent as much as we did,” said Degn, a fourth-generation farmer in Sidney, Montana. The interest rate on his operating note has doubled this year and will be higher in 2023. “We can’t go on.”

Most US farmers depend on short-term variable-rate loans they take out after the fall harvest and before spring planting to pay for everything from seeds and fertilizer to livestock and machinery.

Farmers repay these loans after harvest with cash from their crops before repeating the process. Often, farmers look to get loans later this year or early January to take advantage of discounts on supplier upfront payments and to ensure they aren’t caught off guard as global supplies of fertilizers and chemicals remain tight.

Now, according to interviews with two dozen farmers and bankers, as well as data from the US Department of Agriculture and the Kansas City Federal Reserve, producers are struggling on how to pay off that debt as interest rates climb toward the next planting season.

This rising cost of credit is straining the liquidity of some producers and prompting them to try to reduce their use of fertilizers or chemicals, or to plant fewer seeds next spring. That, in turn, could reduce yields and put upward pressure on the cost of producing that food.

All of this happens when crop prices and global demand are strong. US producers of grains and oilseeds reaped a head start this year as crop prices hit a decade or all-time high as conflict in Ukraine disrupted grain exports from the Black Sea region.

But that financial windfall came as widespread drought hampered crops in the U.S. Plains and sent cattle slaughter rates soaring in Texas. Fertilizer and fuel costs have risen, as have farmland prices and cash rents.

“[Farming] it’s a highly leveraged company, so almost everything is funded,” said Casey Seymour, who runs a farm equipment dealership in Scottsbluff, Nebraska and runs the Moving Iron podcast. “There’s a lot of money out there that gets paid in interest.” .

Total U.S. agricultural sector interest spending — the cost of debt incurred — is expected to reach $26.45 billion this year, nearly 32 percent higher than last year and the highest since 1990, when adjusted for l inflation, according to USDA data.

That sum is double or more than the amount incurred by other U.S. industries, including the retail and pharmaceuticals sectors, where interest expenses have historically been similar or higher, according to US Census Bureau data.

US agriculture sector interest spending – the cost of debt it carries – is seen to rise nearly 40% from 2021 levels, far higher than other leading sectors

LIQUIDITY CONCERNS

Farmers are borrowing more due to higher costs, despite the financial burden this places on their operations.

The average size of bank loans for operating a farm has risen to a nearly five-decade high in dollar terms, according to data from the Kansas City Fed. Average interest rates on such loans are the highest since 2019, data shows.

Most agricultural operating loans tend to be variable, rather than fixed. Floating rate financing carries lower rates than fixed rate financing, but exposes borrowers to the risk of higher costs if rates rise.

This is exactly what happened when the US Federal Reserve started raising short-term rates to quell rising inflation.

The short-term federal funds rate is now in the range of 3.75% to 4%, from a range of 0% to 0.25% in early March, just before Fed policymakers kicked off to raise rates. Inflation is still high, however, and demand is strong, and Fed policymakers have signaled they will continue to hike rates until they see broader evidence of their effect.

In agriculture, the blow has already arrived: The average interest rate on all agricultural operating loans is 4.93%, according to the latest data from the Kansas City Fed.

Many farmers pay more. Ohio corn and soybean farmer Chris Gibbs signed a $70,000 operating loan on May 1 at a variable interest rate of 3.3% with his local lender at the Farm Credit System, a government-sponsored venture. government.

Rising prices of fertilizers and chemicals forced him to borrow more to cover those expenses, even as farm credit continued to drive up costs every time the Fed raised rates. Now its interest rate is 7.35% and it expects it to hit 8% by the end of the year, a 142% increase in eight months.

Gibbs raced to pay off most of his loan by liquidating his crop, rather than storing it and selling it at potentially higher prices next summer. Machinery purchases are suspended and he is looking to pay inputs in cash.

“I have the highest gross value for my crop in my farming history,” said Gibbs, 64. “If I didn’t, I would have tough decisions to make and look at what I can sell.”

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CONCERNS ABOUT MACHINES

The financial blow is being felt on equipment dealer lots, where farmers are forgoing buying equipment on credit, according to interviews with four dealers.

Retailers said they see banks tightening underwriting standards, which can be a barrier for new and smaller farm operators looking for capital to buy equipment.

“It’s easier to get finance when interest rates are low because [banks] are willing to take more risks,” said a CNH Industrial dealer representative, who declined to be named.

Authorized dealers of equipment makers Deere & Co. (DE.N), AGCO (AGCO.N) and CNH Industrial (CNHI.MI) told Reuters that the financing rates offered by the equipment makers themselves are also more than doubled in six months.

Farm equipment loans currently have interest rates of up to 7.65% for Deere, 7.8% for CNH Industrial, 8.14% for AGCO and 8.25% for Ag Direct, according to industry sources. The nationwide industry average is 5.86%, according to data from the Kansas City Fed.

In separate filings, Deere and AGCO said the interest rates they offer depend on the terms of the loan, the creditworthiness of the borrower and the type of equipment. CNH Industrial said interest rates for larger equipment are lower than for smaller machines.

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Reportage by PJ Huffstutter and Bianca Flowers in Chicago; Editing by Andrea Ricci

Our standards: the Thomson Reuters Trust Principles.

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