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 a financial analysis by the American Farm Bureau Federation.

Overall, however, the nation's agricultural balance sheet is strong — although the situation is variable among individual farmers and changing credit conditions will impact the agricultural landscape.

“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,” says AFBF economist Terry Francl. “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.”

In addition, there is now waning interest for new investment in commodity markets, according to AFBF economist Jim Sartwelle.

Folks out there in the investment world have pulled their claws back in a little bit, he says. It's taken money out of the commodity market and lowered commodity prices some. “We've seen the prices of almost all our crop and livestock deals go down,” adds Sartwelle.

Oil prices that continue to creep up over $100 a barrel only add fuel to the fire, as most farm inputs are petroleum products or petroleum-based. “That is going to have an effect on the margins, for crops and livestock both," he says.

The crisis is also impacting how far farmers can extend themselves financially because the cost of credit has risen as the credit supply has been impaired.

“We are very reliant across agriculture on lines of credit because we only sell our products once a year,” says Sartwelle of farmers borrowing money each year to, for instance, buy seed and get their crops in the ground in the spring.

“Unlike the rest of the economy, though, agriculture manages to clear its books at the end of the year,” Sartwelle says. “In agriculture, we've been very responsible. Coming out of the ag credit crisis of the 1980s we've taken our debt-to-asset ratios in agriculture down to numbers that we've never seen before.”

 

Currently, the farm debt-to-asset ratio is at a modern low of 10 percent, thanks in part to projected record high farm income in 2008. Still, like the rest of the country, farmers can expect tighter credit with much stricter conditions, say AFBF economists.

The crunch is already affecting some agribusiness 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 says. Farmers are currently being asked to make commitments for their 2009 fertilizer needs and to pay a substantial portion of that commitment, sometimes 100 percent 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.

 

Spillover effects can also be found in farmers' commodity sales to elevators and processors. In some situations, 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 explains. “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.”

Source: American Farm Bureau Federation