Published 7:00 am Thursday, June 30, 2022
TWIN FALLS, Idaho — Farmers and ranchers are asking their lenders for bigger loans this year due to the surging cost of fuel, fertilizer, feed and labor.
“Expenses are through the roof,” said Eric Bennett, relationships manager at Northwest Farm Credit Services.
Some fertilizer is twice the price it was a year ago, and diesel that was 92 cents a gallon two years ago is now $5 a gallon, he said.
“That’s a problem. Fuel’s just a killer,” he said.
Hay is $260 a ton and corn silage is $60 to $65 a ton standing in the field, compared to $38 to $42 a ton last year, he said.
Producers across the country are feeling the sting of inflation and supply-related shortages — due to such factors as the war in Ukraine and shipping problems — sending the price of some inputs skyward.
As farmers tried to keep up with spiraling operating costs farm lending in the first quarter of the year mushroomed, according to the Federal Reserve Bank of Kansas City.
Total non-real estate bank loans to farmers were up nearly 18% year over year in the first quarter to about $93.4 billion. Operating loans accounted for about 62% of that and were up more than 31% year over year to $57.8 billion.
Although the number of operating loans reached an all-time low for the first quarter, the average size of those loans approached a record high, the bank reported.
Fortunately, most farmers were financially healthy going into the year.
“Most producers had positive earnings in the previous two years and increased their working capital, positioning them to handle a difficult year,” said Doug Robison, Idaho president of Northwest Farm Credit Services.
The 2022 operating renewal season went well despite higher expenses, he said.
“Higher input costs made it necessary to increase operating commitments for many borrowers,” he said.
But customers remain well positioned despite the challenging inflationary environment, and he expects the number of operating loans as well as loan amounts to grow, he said.
The Producer Price Index for farm products in the U.S. increased by more than 34% from April of 2021 through April of 2022, he said.
“The costs for fertilizer and chemical increased at an even faster pace, with the Producer Price Index for nitrogen-based products increasing more than 49% while spot prices for many products have increased by more than 100%,” he said.
Input costs for agricultural producers have significantly outpaced the inflation rate often cited in relation to the Consumer Price Index, which has been above 8%, he said.
Loan officer Bennett has already updated quite a few operating loans since the first of the year, increasing the amount because producers underestimated the cost of fuel and fertilizer. By mid-May they had already determined it was going to take more money to grow this year’s crops, he said.
“The demand for borrowing has increased because of the anticipated cost of production,” he said.
The increase varies, but it’s up 10% on the low end with some loans up 40% year over year, he said.
Producers came into the year in good shape, and Northwest Farm Credit has been able to meet their increased needs, he said.
“I think, in general, credit quality was up because most people made money the last couple of years,” he said.
People added working capital and paid down debt. There wasn’t a lot of debt from last year’s operating cycle, he said.
Water was the biggest concern this year until rains came in April and May and brightened the outlook. But the earlier expectations of cutbacks changed cropping plans. There’s a lot less corn being grown and a lot more wheat as prices neared double-digits a bushel, he said.
“We’re going to be pretty darn short on corn silage this year. Demand will stay high, supply will stay low and it will drive the price high,” he said.
Feed costs — 60% to 66% of a dairy’s cost of production — are going to stay high, he said.
“Dairies are making money now. The concern for dairies is breakeven is going to stay high, but will the milk price hold?” he asked.
If the milk price doesn’t stay at $20 to $21 a hundredweight, dairies are going to lose money, he said.
Row crop farmers are going to be OK, he said.
Labor is another component of the high cost structure, whether it’s crops or dairy. He knows one dairyman who’s already given milkers three raises this year. On average, those wages are $14 to $15 an hour, he said.
Farmers can mitigate some of the risks with crop insurance and revenue protection programs, as well as futures and options to lock in a price floor, he said.
“It would help if the expense side would come down,” he said.
But oil and fuel prices aren’t likely to come down, and labor costs aren’t coming down, he said.
“Farmers are seeing inflation way higher than 8%. Just the cost of doing business is much more than a year ago, two years ago or five years ago,” he said.
“Demand for credit is going to climb,” he said.
Across town, D.L. Evans Bank is also seeing a significant rise in agricultural loans.
“We increased our operating lines about 35% on average,” said Justin Willis, vice president commercial and agricultural loan officer.
Typically, operating loans are fairly close to the previous year, he said.
“This is the highest year of cost of production farmers have seen in my career (21 years),” he said.
Farm diesel is $5 to $5.24 a gallon, up $1 to $1.50 since the beginning of the year. Most producers have on-farm storage for fuel and purchased their needs earlier this year in the $4.50 a gallon range, he said.
“So they dodged that bullet a little bit,” he said.
Fuel was definitely higher this spring than a year ago, and farmers have already absorbed the increase. But other costs are high as well, he said.
“Repairs, maintenance, parts have gone up dramatically, if we can get them … even belts,” Willis said.
All have at least doubled, and the price of used equipment has gone up. An older Peterbilt semitruck that would normally sell for $15,000 to $20,000 has doubled in price, he said.
Another issue for farmers is interest rates. The Federal Reserve raised the prime interest rate to 4.75% in mid-June to tame inflation, and it’ll probably continue to raise interest rates through the year, he said.
On the flip side, crop prices have increased substantially. The price of hay is up 30% from the beginning of the year, and there’s a lot of speculation it will top $300 a ton across the board, not just for dairy hay, he said.
Grain corn prices last year were pushing $5 to $6 a bushel. Contracts were $7 to $7.50 this spring, and the price in June was $8 to $8.50. Wheat prices went from $5.50 to $6 a bushel last year to as high as $9.25 now, he said.
“On a positive note, budgeted revenue is up 40% to 45%,” Willis said.
Because growers don’t contract all of their anticipated production, some of that revenue might be pushing 50% higher than last year, he said.
“The budgeted expenses are up 35% but could be 40% because of rising costs,” he said.
The good news is projected net profit margins have increased 2% to 5% from last year due to the high commodity prices, he said.
“So even though production costs have increased in 2022, revenue is exceeding those costs and profitability is projected to increase by 2% to 5% from the previous year,” Willis said.
Increased costs will increase the bank’s lines of credit for farmers, but they’re all going to get renewed, he said.
“Banks love ag credit. Food is not a commodity that goes out of style. It’s a good risk for the bank. In agriculture, there’s always somewhere to take your crop to sell … people always need food,” Willis said.
He is worried, however, about food costs next year and how that’s going to affect consumer spending and the economy.
This year’s higher commodity prices haven’t gone into the food chain yet, but they will after harvest, he said.
