The end of cheap money for American farmers creates problems in food production

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CHICAGO, Nov 22 (Reuters) – Montana farmer Sarah Degn had big plans to invest the profits she gleaned from her soybeans and wheat this year into upgrading her seeder or buying a new one. storage bin.

But those plans fell through. Everything Degn needs to farm is more expensive — and for the first time in her five-year career, the interest rate on the short-term debt she and almost every other U.S. farmer rely on to grow their crops and raising their cattle is too.

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

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

Farmers repay these loans after harvest with the money from their crops before repeating the process. Farmers often look to secure loans by the end of the year or early January to take advantage of early payment discounts from suppliers and to ensure they are not short-changed as the global supply of fertilizers and chemicals remains limited.

Now growers are wondering how to pay that debt as interest rates rise as the next planting season nears, according to interviews with two dozen farmers and bankers, as well as data from the U.S. Department of Health. Agriculture and Kansas City Federal Reserve.

This rising cost of credit is putting a strain on some growers’ cash flow and prompting them to consider reducing fertilizer or chemical use, or planting fewer seeds next spring. This, in turn, could reduce crop yields and put upward pressure on the cost of producing these foods.

All of this comes at a time of strong crop prices and global demand. US grain and oilseed producers seized the opportunity this year when crop prices soared to decade highs as conflict in Ukraine disrupted grain exports from the Black Sea region.

But the financial windfall came as widespread drought hampered crops on the American plains and sent cattle slaughter rates skyrocketing in Texas. Fertilizer and fuel costs have risen, as have farmland prices and cash rents.

“[Farming] is a highly leveraged business, so pretty much everything is funded,” said Casey Seymour, who manages a farm equipment dealership in Scottsbluff, Nebraska and runs the Moving Iron podcast. “There is a lot of money being paid in interest.

According to USDA data, the U.S. agricultural sector’s total interest expense – the cost of debt borne – is expected to reach $26.45 billion this year, nearly 32% higher than last year and the highest since 1990, when adjusted for inflation.

That sum is double or more the amount incurred by other U.S. industries, including the retail and pharmaceutical sectors, where interest charges have historically been similar or higher, according to U.S. Census data. Desk.

U.S. agriculture sector interest expense — the cost of the debt it carries — is expected to rise nearly 40% from 2021 levels, far more than other major industries

LIQUIDITY CONCERNS

Farmers are taking on larger loans due to higher costs, despite the financial burden this places on their operations.

According to data from the Kansas City Fed, the average size of bank loans for operating a farm has reached a high of nearly five decades in absolute dollars. Average interest rates on these loans are the highest since 2019, the data shows.

Most farm business loans tend to be variable rather than fixed. Variable 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 began raising short-term rates to stifle runaway inflation.

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

In agriculture, the pinch is already here: the average interest rate for all farm 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 May 1 with a variable interest rate of 3.3% from his local lender at Farm Credit System , a government-sponsored company.

Rising fertilizer and chemical prices forced him to borrow more to cover these expenses, even as farm credit continued to raise costs every time the Fed raised rates. Today, his interest rate is 7.35% and he expects it to reach 8% by the end of the year, a 142% increase in eight months.

Gibbs rushed to repay 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 tries to pay for 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 some tough decisions to make and watch what I can sell.”

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MACHINERY CONCERNS

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

Dealers said they see banks tightening underwriting standards, which can be a barrier for newer, smaller farmers looking for capital to purchase equipment.

“It’s easier to get financing when interest rates are low because [banks] are willing to take more risk,” said a CNH Industrial dealer representative, who requested anonymity.

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

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

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

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

Our standards: The Thomson Reuters Trust Principles.

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