The end of cheap money for US farmers is bringing trouble to food production

By PJ Huffstutter and Bianca Flowers

CHICAGO (Reuters) – Montana farmer Sarah Degn had big plans to invest the healthy profits she’s made this year on her soybeans and wheat into upgrading her planters or buying a new storage container.

But these plans fell 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 almost every other U.S. farmer depend on to grow their fields and raise their livestock .

“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 their operating note doubled this year and will be higher in 2023. “We do not get any further.”

Most U.S. farmers depend on short-term, adjustable-rate loans, which 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 post-harvest loans using cash from their crops before repeating the process. Farmers often try to secure credit through the end of the year or early January to take advantage of suppliers’ early payment rebates and ensure they don’t miss out as global supplies of fertilizers and chemicals remain tight.

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 now wrestling with how to pay off that debt as interest rates rise toward the next planting season.

These rising borrowing costs are taking a toll on some producers’ liquidity, prompting them to reduce their use of fertilizers or chemicals, or plant fewer seeds next spring. This, in turn, could reduce crop yields and drive up the cost of producing these foods.

All of this is due to strong crop prices and global demand. US grain and oilseed producers reaped a boon this year as grain prices hit decade or all-time highs as conflict in Ukraine disrupted grain exports from the Black Sea region.

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

“[Farming] It’s a heavily leveraged business, 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’s paid for with interest.”

According to USDA data, total US farm interest expense — the cost of the debt it carries — is expected to reach $26.45 billion this year, up nearly 32% year-on-year and the highest since 1990, adjusted for inflation.

That amount is at least double the amounts incurred by other US industries, including retail and pharmaceutical products, where interest expense has historically been similar or higher, according to US Census Bureau data.

GRAPHIC: Interest expense on farm debt soars – https://graphics.reuters.com/FARM-INTEREST/FARM-INTEREST/znpnbekbqpl/graphic.jpg

LIQUIDITY PROVISION

Farmers are taking on larger loans because of the higher costs, despite the financial strain it places on their operations.

The average bank loan amount needed to operate a farm has soared 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, the data shows.

Most farm business loans are variable rather than fixed. Variable rate financing carries lower interest rates than fixed rate financing, but exposes borrowers to the risk of higher costs if interest rates rise.

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

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

In agriculture, the dilemma is already here: the average interest rate on 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 at a 3.3% variable interest rate with his local lender, the Farm Credit System, a government-sponsored company.

Rising fertilizer and chemical prices forced him to borrow more to meet those expenses, even as Farm Credit kept increasing costs every time the Fed hiked interest rates. Now its interest rate is 7.35% and it expects it could hit 8% by the end of the year — up 142% 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 the next summer. Machine purchases are on hold and he tries to pay for the upfront costs with cash.

“I have the highest gross value of my crop in my history as a farmer,” said Gibbs, 64. “If I didn’t, I would have to make tough decisions and see what I can sell.”

GRAPH: US farmers take on bigger debt – https://graphics.reuters.com/FARMERS-DEBT/klvygeomqvg/chart.png

MACHINE CONCERNS

According to interviews with four dealers, the financial impact is being felt on equipment dealers’ properties, where farmers refrain from buying equipment on credit.

Traders said they are seeing banks tightening underwriting standards, which can be a hurdle for newer and smaller farm operators seeking capital to purchase equipment.

β€œIt’s easier to get financing when interest rates are cheap because [banks] willing to take more risk,” said a dealer rep for CNH Industrial, who asked not to be named.

Authorized dealers for equipment manufacturers Deere & Co., AGCO and CNH Industrial told Reuters that financing rates offered by the equipment manufacturers themselves have also more than doubled in six months.

According to industry sources, farm equipment loans currently have interest rates up to 7.65% at Deere, 7.8% at CNH Industrial, 8.14% at AGCO and 8.25% at Ag Direct. The statewide 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, the borrower’s creditworthiness and the type of equipment. According to CNH Industrial, interest rates for larger equipment are lower than those for smaller machines.

GRAPHIC: Funding the Farm Funding the Farm – https://graphics.reuters.com/US-FARMS/mopakmzwrpa/chart.png

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

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