Next Threat Stalking American Farmers Is the End of Cheap Money
(Bloomberg) -- American farmers have managed to stay afloat despite years of shrinking crop values, the lowest incomes since the recession and a budding trade war with China. Now, they’re feeling a new squeeze -- borrowing money is getting more expensive as interest rates rise. For some, it may be fatal.
“Commodity prices stink, and they’re set to stink for a long time,” said Jason Barnes, 50, who has 400 head of cattle and farms 1,300 acres of corn, wheat and sunflowers about 35 miles (56 kilometers) north of Pierre, South Dakota. “We’ve been able to survive because of cheap money. You raise rates high enough, it will have a huge impact on people’s ability to continue farming."
The Federal Reserve is tightening credit as the economy shows signs of strength, ending a prolonged period of low interest rates in the wake of the financial crisis. As a result, banks pushed the fixed rate on U.S. farm loans to a five-year high of 5.6 percent in the fourth quarter, up from 5.3 percent a year earlier, Fed data show. With more increases expected through 2019, farmers may see their thin profit margins evaporate.
For Barnes, a former banker who took over his father’s farm in 2012, the increase means he is spending $3,000 more than last year on his $350,000 operating loan. That’s money he won’t spend on hiring local workers to handle maintenance or repairs on things like watering systems, fences and cattle pens, as he normally would. If rates keep rising, he could be paying an additional $5,000 in interest by 2020.
“It’s going to get difficult as the Fed keeps raising rates,” said Jerry Catlett, president and chief operating officer of Bruning State Bank in Bruning, Nebraska, about 100 miles southwest of Omaha. Catlett already is factoring in higher debt burdens this year for farmers when assessing their creditworthiness, which means some will get smaller loans or none at all, he said.
Net farm income will drop in 2018 for the fourth time in five years, to $59.5 billion, down from a record $123.8 billion in 2013 and the lowest since 2006, according to the U.S. Department of Agriculture. If higher debt costs force farmers to sell land or quit, that could hurt rural communities that rely on those businesses for jobs and tax revenue.
“It’s people who aren’t buying tractors or pickups, or working on their house or going to a restaurant," said Mike Yackley, who manages the BankWest Inc. branches in Selby and Onida, South Dakota, separated by 60 miles on Highway 83. The towns, in the north-central part of the state, have a combined population of 1,300.
To be sure, lenders don’t expect the U.S. will see a repeat of the widespread bankruptcies that led to the farm crisis in the 1980s. Back then, the industry was hit by interest rates above 15 percent, surging fuel costs, too much debt, slumping commodity prices and a strong dollar that hurt exports.
Farms tend to be bigger today, and for many older producers, debt is more manageable than three decades ago. While total borrowing will be an estimated $389 billion this year, the ratio of debt to total farm equity remains little changed over the past decade at under 13 percent. It was twice that in the 1980s.
Also, many farmers stockpiled cash during the boom years through 2012, when record crop prices sent profit surging. U.S. farmland reached $3,020 an acre on average in 2015, twice as much as a decade earlier. Land in Iowa, the No. 1 U.S. corn producer, was a record $8,500 an acre in 2014.
When rates were low, it was easy for cash-rich farmers to buy out their neighbors to expand output, and everyone from hedge funds to city dwellers with rural dreams was investing in agricultural land. Some growers rented more acres to boost production while crop prices were high.
But that helped create global surpluses and a prolonged slump in prices, which put the economics of farming at greater risk, especially as costs increase. The prospect of more-expensive debt is adding to that pressure. The Fed, which held its benchmark rate near zero for almost seven years, predicts it will reach 3.4 percent by 2020, compared with today’s 1.75 percent.
A Chicago Fed survey of bankers in five Midwest states, including Iowa and Illinois, showed credit conditions for farmers deteriorated in the fourth quarter of 2017 from a year earlier. The Fed also predicted that capital expenditures would drop in 2018 for a fifth straight year.
Across the country, farmland prices are flat or declining.
Farmers most at risk in a higher-rate environment will tend to be larger commercial producers who require bigger operating loans, along with younger growers who took on debt during the boom, said Catlett, the Nebraska bank president.
Still, recent rallies in corn and soybeans, the two biggest U.S. crops, have sparked some optimism that global supplies are starting to align with demand. Even wheat and rice are higher than they were a year ago, as are hogs and feeder cattle.
Rising interest rates -- even small ones that accumulate over time -- threaten that recovery, said Brent Gloy, a visiting agricultural economist at Purdue University in West Lafayette, Indiana. Most farmers use their land as collateral to obtain loans that cover expenses during the year, and then pay off the debt after the harvest, he said.
“The first impact is the increase in operating costs,” Gloy said. “The second is the lower returns on farmland, which should push prices down. Over the long term, if rates get high enough, you would see a contraction in agriculture.”
©2018 Bloomberg L.P.