WEST LAFAYETTE, Ind. — Agriculture’s economy may be in for rough going over the next few years, with farmer debt and the possibility of interest rate hikes listed as key concerns by some faculty in Purdue University’s College of Agriculture.
"It’s not a bed of roses, what we’re going to go through," said Chris Hurt, a professor of agricultural economics. "It’s going to vary from family to family just how much adjustment. Some of that’s going to depend on how locked-in were they. How much did they lock in their equipment, high land values, high cash rents for five years?"
The financial picture in ag is changing and there are questions about how much strength there is going forward, noted Jason Henderson, associate dean in the college and director of Purdue extension, and former economist for the Federal Reserve Bank of Kansas City. In 2010 and 2011, bankers said there was plenty of cash and there was no growth in farm debt at commercial banks, both in non-real estate and real estate.
"But over the last 12 months, you’re seeing growth in farm debt, mainly for that non-real estate or operating loan lines, going up about double digits," he noted. "I think a lot of that is concerning because what farmers are doing is, they’re having negative margins and are rolling that loan going forward.
"How much of crop inputs are going to be prepaid this fall? Probably not as much as it was in past years." Some agricultural bankers have told Henderson they expect a higher number of loan renewals, lower repayment rates and increasing farm operating loan demands.
The Purdue faculty spoke Oct. 30 during a webinar hosted by the university’s Center for Commercial Agriculture. Farmers should think about how their operations might handle a multiyear decline in the agricultural economy, said James Mintert, a professor of agricultural economics.
"We’re building a case for some stress testing about what a weaker economy and an environment with some rising interest rates would do to your operation. Think about how you might respond to that, and have those plans in place. Get ready to pull some triggers if it looks like you need to," he noted.
The Federal Reserve’s long-term forecast predicts interest rates will rise 3-4 percentage points over the next few years, Henderson said. "As these interest rates rise, you’re going to see farm-level interest rates rise at a similar path," he explained. "If fed funds rates add about 4 percentage points to their levels, you’re going to look at farm lending rates add about 4 percentage points to their levels.
"So, if you’re thinking about 4 percent for a farmland loan today, you’re looking at 8 percent in a couple of years."
The U.S. economy has been operating below potential since the recession, but as it continues to improve, inflationary pressures will increase and the Federal Reserve will look to raise interest rates, Henderson said.
The possibility of higher interest rates plus smaller margins could lead to challenging situations for some farmers, said Michael Langemeier, a professor of agricultural economics. "It looks to me like you’ve got a storm brewing here. Margins are down, plus you have higher interest rates so it’s harder to pay off the debt. We’ve got some repayment issues at least for some operations that are going to be very difficult."
Farmers also face concerns regarding exports over the next few years, Hurt said. "Agriculture in the United States is an export-oriented industry," he noted. "We have surplus production and we need that foreign market.
"Generally, when our exports are strong, farm incomes are strong. There will be very heavy headwinds for us in the next one, two, three years in trying to get that volume of exports we need in our surplus production industry."
China has seen its currency drop 4 percent over the past year versus the U.S. dollar, Hurt said. "If soybeans were priced at the same level a year ago and today, they would actually cost 4 percent more for the Chinese. Japan, Mexico and Korea are our three leading corn buyers and their buying power has dropped 12 to 21 percent over the last year. Those are pretty big headwinds."
Brazil’s currency, the real, is down 40 percent, meaning a country such as China could buy soybeans from Brazil for 40 percent less than it would pay for U.S. soybeans, he added.
"These are not just headwinds. That’s a tornado or a hurricane facing us. These are big concerns," Hurt said.
