October 7, 2008 at 1:13 am #3393
U.S. farmers endure credit crunch, worry about 2009
Fri Oct 3, 2008 By Karl Plume
CHICAGO (Reuters) – Backed by solid income from two years of record-high grain prices, U.S. farmers are weathering the credit crunch well as operating loans from smaller community banks are still readily available.
But 2009 could pose a challenge. “It’s a perfect example of the calm before the storm,” said John Conway, a corn and soybean grower in Wellman, Iowa.
He said many producers are worried that profits will evaporate next year as grain prices retreat further from this year’s high levels while input costs remain uncomfortably high, a situation which economists say could turn dire if credit were unavailable.
Agricultural economists stress that most farmer balance sheets remain solid at the moment, thanks to high land values and record crop prices over the past two years. Net U.S. farm income, a gauge of profitability, is expected to increase by 10 percent this year to a record $95.7 billion. The debt-to-asset ratio for the agricultural sector is 9 percent, down from 11.3 percent in 2004.
Corn prices reached a record high of more than $7 a bushel this summer while soybean prices were more than $16 a bushel, but both have pulled back substantially since then. Farmers also face a tighter squeeze ahead as fertilizer costs have tripled in the past two years while seed and fuel costs have doubled.
“If you step back three or four paces and look at the whole picture for the coming year, the inputs that all crop farmers are facing are gargantuan compared to what we’ve seen in the past,” Conway said.
He added that his farmer cooperative borrowed more money this year for a single input, anhydrous ammonia fertilizer, than it did for all operating costs combined two years ago. The crucial fertilizer has risen from $350 a ton in 2006 to near $1,200.
PAYMENTS DUE IMMEDIATELY
To complicate matters, many farmers are being asked to pay in full for some inputs like fertilizer months before taking delivery. In the past, farmers needed to pay only a small percentage initially, with full payment due upon delivery.
“A lot of the dealers are being asked to prepay from their suppliers so they are in turn requiring that from their producer clients,” said University of Illinois agricultural economist Darrel Good.
“It has to do with the extreme price volatility so if people are going to make a commitment on supply and price they want that money up front,” he said. Such practices had become more common even before credit markets seized up, but if Wall Street’s credit woes spread further into rural America the credit-intensive agricultural sector could suffer.
If credit is unavailable, farmers may plant fewer acres or cut back on fertilizer and hope their fields have enough residual nutrients to carry another crop, analysts said.
Congress passed an amended $700 billion financial bailout bill on Friday, which was expected to help ease a credit market freeze and was welcomed by Wall Street investors. But the stock market remained under pressure late on Friday as government data released earlier in the day showing the steepest job losses in 5-1/2 years may mean the economy is in recession.
Still, many rural banks are weathering the credit crisis well due to their limited exposure to struggling securities and risky mortgages, economists said. “We’re not seeing tremendous financial stress in the farm sector like we’re seeing everywhere else,” said Paul Ellinger, agricultural economist at the University of Illinois.
“Community banks rely a lot on commercial deposits so fund availability has certainly not been as large of an issue as it has for the larger Wall Street banks.”
Farmers around the Corn Belt are at the moment largely focused on harvesting corn and soybeans and are resigned to worry about any potential credit issues only later this fall or early next year.
October 7, 2008 at 1:17 am #6529
Here is heads up on credit & economy crisis creating by-product crisis for Ethanol-Farming/Fertilizer-Petcoke markets. The Fertilizer industry is undergoing a third shock wave as credit crunch may force up-front payment on tripled cost.
The sharp rise in Nat Gas prices from $4.5/MMBTU to $10/MMBTU closed nearly half US plants & left 57% operating on alternate fuel (i.e. Petroleum Coke Gasifiers like Coffeyville’s) and the US shifted from a Fertilizer exporting country to an Importing one. Prices increased from $100/ton domestic cost to over $350/ton imported cost and now quoted at $1200/ton due to increased demand from shift corn from agriculture to source Ethanol for Oil industry.
All of agriculture has been impacted but the speculation of commodities & induced shortage of grain production as result of heavy subsidy & environmentally driven use of ethanol for gasoline blending even though it is not economic using grain, and yields 3-5mpg less mileage in 10% gasoline blend.
The NG demand destruction of its use in Fertilizer production (previously ~one top 5 consumers NG) had significant impact on price once several Katrina damaged NG platforms were restored. The same is thing is set to happen, but lesser extent, for both petcoke & coal consumption by Gasifiers for production of Fertilizer products. Even high price grains for use Ethanol may not help Farmers 2009 who depend on Rural Bank loans to bridge farming planting cost until harvest sales in credit tight market and debt heavy agricultural industry with low ROI.
Worse still is that the US domestic & global strength as grain producer will be put in even more stress as Liberals continue push a bad answer to higher Ethanol blend (20%) targets even though the 10% blend increased all food cost to near crisis levels and put some developing countries into starvation & famine crisis.
You must be logged in to reply to this topic.