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Here Is The Next Big Threat Facing American Farmers

Courtesy of ZeroHedge. View original post here.

Despite the media’s assertion that President Trump’s animating political principle is “stay loyal to the base”, the White House is coming incredibly close to alienating one of the president’s most reliable constituencies: The American farming community.

Farmers practically begged Trump to back down from his burgeoning trade war when China slapped tariffs on 128 products, including walnuts and California wine. And when Chinathreatened to deploy one of the most powerful weapons in its trade arsenal: tariffs on US soybeans, it only further escalated the tension.

But China’s tariffs on agricultural products are only a small part of the problems facing American farmers.

As we pointed out earlier this month, the White House’s tariffs on aluminum and steel attempted to solve one problem but created another. And the “unintended consequences” from the steel tariffs are hurting agricultural jobs across the Midwest.

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And today, Bloomberg pointed out that the Federal Reserve’s “gradual” normalization of interest rates has pushed the fixed rate on US farm loans to a five-year high of 5.6%, up from 5.3% a year earlier.

This is happening while farmers are still reeling from an agricultural commodity slump that resulted in the lowest incomes since the recession. And while crop prices are higher than they were a year ago, they’re not yet high enough to be a reliable offset.

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Jason Barnes, a farmer in South Dakota, expressed concern that his business might not be able to survive without cheap loans.

“Commodity prices stink, and they’re set to stink for a long time,” said Jason Barnes, 50, who has 400 head of cattle and farms 1,300 acres of corn, wheat and sunflowers about 35 miles (56 kilometers) north of Pierre, South Dakota.

“We’ve been able to survive because of cheap money. You raise rates high enough, it will have a huge impact on people’s ability to continue farming.”

Another farmer complained that rising rates would mean spending $3,000 more than last year to service a loan.

The Federal Reserve is tightening credit as the economy shows signs of strength, ending a prolonged period of low interest rates in the wake of the financial crisis. As a result, banks pushed the fixed rate on U.S. farm loans to a five-year high of 5.6 percent in the fourth quarter, up from 5.3 percent a year earlier, Fed data show. With more increases expected through 2019, farmers may see their thin profit margins evaporate.

For Barnes, a former banker who took over his father’s farm in 2012, the increase means he is spending $3,000 more than last year on his $350,000 operating loan. That’s money he won’t spend on hiring local workers to handle maintenance or repairs on things like watering systems, fences and cattle pens, as he normally would. If rates keep rising, he could be paying an additional $5,000 in interest by 2020.

“It’s going to get difficult as the Fed keeps raising rates,” said Jerry Catlett, president and chief operating officer of Bruning State Bank in Bruning, Nebraska, about 100 miles southwest of Omaha. Catlett already is factoring in higher debt burdens this year for farmers when assessing their creditworthiness, which means some will get smaller loans or none at all, he said.

With farm income set to drop again in 2018, some observers are worried that the higher debt-servicing costs will force farms out of business – further impairing the economy in some of the hardest-hit parts of the country.

Net farm income will drop in 2018 for the fourth time in five years, to $59.5 billion, down from a record $123.8 billion in 2013 and the lowest since 2006, according to the U.S. Department of Agriculture. If higher debt costs force farmers to sell land or quit, that could hurt rural communities that rely on those businesses for jobs and tax revenue.

“It’s people who aren’t buying tractors or pickups, or working on their house or going to a restaurant,” said Mike Yackley, who manages the BankWest Inc. branches in Selby and Onida, South Dakota, separated by 60 miles on Highway 83. The towns, in the north-central part of the state, have a combined population of 1,300.

Luckily, modern farms tend to be larger than they were in decades past – meaning a repeat of the 1980s farm crisis is unlikely. Also, many farmers socked away cash when crop prices were high, which has helped to tide them over during the lean years.

Three

However, higher rates will almost certainly impact their ability to expand, cutting off one potential avenue for growth for smaller farms that are struggling to compete with their larger peers.

To be sure, lenders don’t expect the U.S. will see a repeat of the widespread bankruptcies that led to the farm crisis in the 1980s. Back then, the industry was hit by interest rates above 15 percent, surging fuel costs, too much debt, slumping commodity prices and a strong dollar that hurt exports.

Farms tend to be bigger today, and for many older producers, debt is more manageable than three decades ago. While total borrowing will be an estimated $389 billion this year, the ratio of debt to total farm equity remains little changed over the past decade at under 13 percent. It was twice that in the 1980s.

Also, many farmers stockpiled cash during the boom years through 2012, when record crop prices sent profit surging. U.S. farmland reached $3,020 an acre on average in 2015, twice as much as a decade earlier. Land in Iowa, the No. 1 U.S. corn producer, was a record $8,500 an acre in 2014.

When rates were low, it was easy for cash-rich farmers to buy out their neighbors to expand output, and everyone from hedge funds to city dwellers with rural dreams was investing in agricultural land. Some growers rented more acres to boost production while crop prices were high.

But that helped create global surpluses and a prolonged slump in prices, which put the economics of farming at greater risk, especially as costs increase. The prospect of more-expensive debt is adding to that pressure. The Fed, which held its benchmark rate near zero for almost seven years, predicts it will reach 3.4 percent by 2020, compared with today’s 1.75 percent.

A Chicago Fed survey of bankers in five Midwest states, including Iowa and Illinois, showed credit conditions for farmers deteriorated in the fourth quarter of 2017 from a year earlier. The Fed also predicted that capital expenditures would drop in 2018 for a fifth straight year.

With Treasury Secretary Steven Mnuchin preparing to head to Beijing to try and quash the US-China trade-beef, farmers can breathe a temporary sigh of relief. But the Federal Reserve seems intent on raising interest rates at least three – and possibly four (or more) times this year…

And there’s always the possibility that KKR is right, and a recession in the next two years is inevitable – at which point, the Fed would probably roll back interest rates as it’s forced to consider QE4.


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