Crisis Hikes Farmers' Costs, But Sector Is Strong

Farm Bureau releases analysis of financial crisis.

Published on: Sep 29, 2008

The current financial crisis gripping the United States could moderate global and domestic demand for U.S. farm products and intensify an already volatile price situation for both commodities and the supplies that farmers must purchase, according to financial analysis issued by the American Farm Bureau Federation. However, overall, the nation's agricultural sector is in good financial condition at the farm level, which could serve to cushion the impact of the financial crisis.

According to the analysis prepared by AFBF economists, overall the U.S. agricultural balance sheet is very strong, although the situation is always variable among individual farmers and ranchers.

"The fallout from the general financial malaise is being felt worldwide, especially in countries that may be already facing slowing economies due to the high price of energy," according to AFBF Economist Terry Francl, one of the authors of the analysis. "This will most likely moderate the demand for agriculture products and ingredients, reduce the demand for U.S. agricultural exports and ultimately affect U.S. farm prices. Likewise, a slower domestic economy would also weigh on the demand for farm commodities and prices."

Francl indicated that the Agriculture Department is projecting record high farm income in 2008. Another measure of economic health in farm country, debt-to-asset ratio, is at a modern low of 10%.

The analysis states, however, that within the United States, the credit supply is being impaired, which affects the cost of credit. This crunch is already affecting some agri-business companies, as reflected by recent developments in the fertilizer sector, according to Francl.

"Fertilizer prices have basically doubled in the past two years and continue to rise," Francl said. "Farmers are currently being asked to make commitments for their 2009 fertilizer needs and to pay a substantial portion of that commitment, sometimes 100% up front. The credit function of these transactions is being shifted from the fertilizer producers and retail dealers to the farmers. The net result is that it increases the farmer's cost."

The report also notes that spillover effects are affects farmers' commodity sales to elevators and processors. Farmers are not being asked to provide more credit, but are being offered a lower price for their crops, generally due to the higher "basis," which is the difference between the futures price and the local cash price.

"The net impact of either the higher cost or lower prices is the same – less income for farmers," Francl explained. "There are many factors other than just credit availability affecting the returns to U.S. agriculture, but the current financial instability simply serves to exacerbate the already volatile input/output price situation. So the sooner action can be taken to stabilize the credit market the better it will be for agriculture and the country as a whole."

Source: Feedstuffs