Shrinking margins hitting US farm credit

Lenders have told a Congressional panel that macroeconomic conditions are hurting farmer incomes, stretching credit thin and locking out younger farmers.

Stress on the US farm sector is stretching the country’s agri credit resources, cutting farm incomes and creating barriers to entry for farmers entering the industry, politicians and agri experts told a US Congressional panel on Tuesday.

Shrinking margins continue to be a problem for farmers in the US Midwest and South, making it increasingly difficult to repay operating loans, said Georgia’s Republican Representative Austin Scott.

“We’ve seen a 56 percent net drop in farm incomes over the last three years,” said Scott. “While input costs have softened, they remain near historic highs and some of our biggest foreign competitors are increasing their subsidies, tariffs and non-tariff trade barriers.”

The financial crunch is driving growers to take on more debt to stay afloat. Term loans for agri finance company CHS Capital jumped from $55.5 million in Q1 2015 to $226.5 million in 2016, said Randy Nelson, its president.

“Nearly all the term loans were written to refinance existing real estate, versus new real estate transactions,” said Nelson. “We expect the number of term loans to continue to increase if prices remain low.”

CHS Capital has also seen increases in past-due loans, extension requests on operating loans, selling off assets and stockpiling of crop inventory in the hope that pricing  will strengthen, he added.

Agricultural credit availability has remained resilient so far this year, but Tim Buzby, chief executive of the Federal Agricultural Mortgage Corporation (Farmer Mac), urged caution, advising lenders to remain “supportive but firm with their customers’ [credit] requests”.

A credit crisis in the US agriculture sector could be disastrous for US crop production, warned Representative David Scott, a Georgia Democrat who said high land prices and limited access to credit serve as a barrier to new farmers hoping to enter the industry.

“Without access to credit farmers cannot put a crop in the ground,” said Scott. “I’m especially worried about beginning farmers who are the future of production agriculture in this country and in the world. If we cannot provide a path to capital to these new farmers then we will continue to see an ageing population of farmers.”

Since 1982, the average age of principal farm operators has increased from 50.5 to 58.3 years old, according to the national agriculture census. “For a young beginning farmer, entering into farming is an uphill battle. Without the support of a family structure and perhaps an older farmer within the family who is exiting the business it is very difficult to get started,” said Buzby.

Current low interest rates are a mixed blessing for farmers who are starting out and hoping to acquire land, said Buzby, as depressed interest rates can inflate farmland values, as they increase the discounted value of future returns from farming operations. Other challenges to those farmers include high equipment costs, farm rents and increasing debt burdens from student loans.

Under current conditions US operators face the challenges of both an inventory surplus and a shortage of young operators to replace them as they retire.