Economic News
End Of Cheap Money For U.S. Farmers Hurts Food Production
Farmer, Sarah Degn, planned to put her soybean and wheat proceeds in a new planter or storage bin but plans fell through. Everything Degn needs to farm is more expensive, and so is the interest rate on the short-term financing she and practically every other U.S. farmer relies on to grow crops and rear cattle.
Kentucky’s wheat harvest
Sarah Degn planned to put her soybean and wheat proceeds in a new planter or storage bin.
Plans fell through. Everything Degn needs to farm is more expensive, and so is the interest rate on the short-term financing she and practically every other U.S. farmer relies on to grow crops and rear cattle.
“We generated more money this year, but we spent just as much,” said Montana farmer Degn. Her operating note’s interest rate increased this year and will double in 2023. We’re stuck.
Most U.S. farmers rely on short-term, variable-rate loans to pay for seeds, fertilizer, livestock, and machinery.
Farmers repay these loans with crop proceeds after harvest. Farmers seek loans by year’s end or early January to take advantage of early-pay discounts and to avoid running out of fertilizers and chemicals.
According to conversations with two dozen farmers and lenders, the U.S. Department of Agriculture, and the Kansas City Federal Reserve, producers are struggling to pay off loans as interest rates rise for the upcoming planting season. The growing cost of loans is causing some producers to reduce fertilizer or chemical use or plant fewer seeds next spring. This might diminish crop production and raise food costs.
Crop prices and worldwide demand are high. The unrest in Ukraine hindered grain exports from the Black Sea region, boosting U.S. grain and oilseed prices.
This cash windfall came while drought in the U.S. Plains hampered crops and boosted Texas cattle slaughter rates. Fertilizer, fuel, cropland, and cash rents have risen.
Casey Seymour manages a farm equipment dealership in Scottsbluff, Nebraska, and hosts the Moving Iron podcast. Interest payments are huge.
The amount of debt borne by the U.S. farm industry is expected to reach $26.45 billion this year, up 32% from previous year and the largest since 1990, according to USDA figures.
According to U.S. Census Bureau data, the number is double or more the amount incurred by other U.S. industries, including retail and pharmaceuticals. The U.S. farm sector’s interest burden – the cost of their loan – is expected to rise about 40% from 2021 levels.
Liquidity worries
Due to increased costs, farmers are taking out greater loans despite the financial stress.
According to Kansas City Fed data, agricultural operations loans have reached a near five-decade high in dollar terms. These loans have the highest average interest rates since 2019, data shows.
Variable farm operating loans are common. Variable-rate loans provide lower rates than fixed-rate loans, but borrowers risk higher fees if rates rise.
When the Fed raised short-term rates to curb inflation, that’s what happened. The short-term federal funds rate is currently 3.75 to 4%, up from 0% to 0.25% before Fed rate hikes. Inflation is still high and demand is strong, so Fed policymakers will keep hiking rates until they see results.
Agriculture feels the pinch: According to the Kansas City Fed, farm operating loan interest rates average 4.93 percent.
Farmers pay more. Chris Gibbs signed up for a $70,000 operating loan with the Farm Credit System, a government-sponsored company, on May 1.
Rising fertilizer and chemical prices compelled him to borrow more to cover expenses, even as Farm Credit raised rates each time. He anticipates his interest rate to reach 8% by year’s end, a 142% increase in eight months.
Gibbs liquidated his harvest to pay off his loan rather than keep it for greater prices next summer. He’s postponing machinery purchases and paying for inputs in cash.
Gibbs, 64, has his biggest crop gross value ever. “If I didn’t, I’d have to sell things.” Farmers aren’t buying equipment on credit, according to four dealers.
Dealers say banks are tightening underwriting rules, which can be a problem for smaller farmers seeking equipment financing.
“Banks are ready to accept greater risk when interest rates are low,” a CNH Industrial dealer rep remarked.
Equipment makers Deere & Co. (DE.N), AGCO (AGCO.N), and CNH Industrial (CNHI.MI) said in a recent report that their own finance rates have quadrupled in six months.
Deere, CNH Industrial, AGCO, and Ag Direct have interest rates up to 7.65%, 7.8%, 8.14%, and 8.25%, respectively. Kansas City Fed statistics shows a 5.86% industry average.
Deere and AGCO claimed loan conditions, borrower creditworthiness, and equipment type affect interest rates. Larger equipment has cheaper interest rates, according to CNH Industrial.
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