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.