Input Costs are Going Up and Farmers are Borrowing More to Cover Them

For farmers it’s inevitable, rather like death and taxes. When farm commodity income goes up, so do input costs. Farm activists like to explain this condition in conspiracy terms. Ag economists often explain it as increased demand causing a rise in the price of the input. The reasons are never simple.

Last year’s drought caused higher commodity prices which in turn helped make up for decreased crop yields for the farmer’s bottom line. But, inputs are headed up, and so is farmer borrowing to cover them, from a new report out by the Federal Reserve Bank of Kansas City.

Total volumes for non-real estate farm loans rose at the fastest pace in three years during the quarter as commercial banks made more loans at higher average amounts.

This chart shows the upward input costs especially in the fourth quarter of 2012:

From the report, here are a few reasons cited for driving up the increase in loans:

● Escalating feed and livestock costs contributed to higher lending activity to livestock operations.

● High fuel costs during harvest and rising fertilizer and seed prices prompted crop producers to pre-pay for 2013 crop inputs.

● Bankers reported a fourth quarter spike in farm machinery and equipment loans. Lending for farm machinery and equipment surged as farmers made capital purchases prior to the expiration of accelerated depreciation at the end of 2012. (Tax provisions allowing accelerated depreciation on qualifying farm asset purchases such as machinery, equipment, and special–use or single–purpose agribusiness buildings, including grain bins, drying systems, and livestock barns, were set to expire at the close of 2012. Producers taking advantage of the tax incentive helped to more than double the volume of farm machinery and equipment loans compared with last year.)

● Lending for other intermediate loans for unspecified purposes also rose sharply during the quarter.

● Commercial banks reported a surge in farm real estate loan volumes heading into the fourth quarter. Elevated farmland prices and potential changes in tax policies motivated more land owners to sell before the end of the year.

● Farm interest rates fell to new lows, with some banks easing collateral requirements.

● Stronger profits lifted average capital ratios at agricultural banks to record highs.

Also, note that farm loan delinquency rates remain low, and banks are competing with each other for them.

4 thoughts on “Input Costs are Going Up and Farmers are Borrowing More to Cover Them

  1. martin harris

    for the last couple of crop seasons, the cost of natural gas has gone down to near-term historic lows. NG cost is a major component of fertilizer manufacture. It would be interesting to see a chart of fertilizer cost to farmers plotted against the decline in NG cost to manufacturers.
    MH

    Reply
    1. K. McDonald Post author

      martin
      Like I said these things are never simple.
      If you read my recent post: http://www.bigpictureagriculture.com/2013/01/u-s-will-again-produce-more-nitrogen-fertilizer-for-agriculture-311.html
      about nitrogen fertilizer, more than half of it is now imported, so we aren’t able to take advantage of the low prices of natural gas until we open new nitrogen fertilizer plants in the U.S., once again, to bring the price down. That is in the process of happening. But, yes, there is quite a profit margin to be had!

      Reply
  2. Jason

    I am hearing complaints from those in the organic sector that they can’t get operating lines of credit, even with a history of organic production and organic grain and hay prices also at record highs. The latest USDA data shows a decline in certified organic cropland, which may be due to a combination of high conventional commodity prices and lack of capital for organic farmers.

    Reply

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