Ask Farm Aid | December 7, 2008

How is the credit crisis affecting farmers and agriculture in America?

December 2008

Dear Hilde,

We recently saw how a disruption in the commercial credit markets severely disrupted the flow of money among large commercial companies. The result was the “Wall Street Bailout.” However, what about credit for farmers? Am I right that most farmers need to borrow money to plant?

Thanks,

Jere Williams
Framingham, MA

Dear Jere,

Much of our country remains in shock as we try to sort through one of the shakiest economic times in history. News continues to report on Wall Street bailouts and auto industry recoveries, but not much press has established the critical link between the accessibility of credit and the stability of one of our most fundamental economies: farming!

Stuck between a credit crunch and a price squeeze doesn’t sound much different than a rock and a hard place, and that’s exactly where many US farmers are finding themselves this winter as they try to make sense of their financial future.

Not your average day at the office…

All too often food is treated like any other commodity and farming like any other profession. But the reality is that both don’t fit neatly into most economic curves and job descriptions.

To begin, farmers depend on loans to get them through their initial investment: to pay for the seed and feed and other inputs needed to get things in the ground and growing! Furthermore, farmers don’t begin to reap any returns on their investment for at least a month, and generally, many more. Or not at all, if weather or a pest wipes out their crop altogether. Imagine taking a job for which you not only won’t get paid for a whole season, but for which you have to supply the expenses upfront! Not a particularly enticing offer, is it?

The real irony about food and farming, however, is that even in a “good” year, when nature cooperates and yields are high, farmers don’t necessarily make more cash to stow away for future investments. This is because food is what economists like to call inelastic. In other words, regardless of how much farmers grow there is literally only so much we as consumers can stomach (and, in turn, are willing to buy). The greater the supply of a particular crop on the market, the lower the price drops in response to this inelastic demand; and since consumers are buying more or less the same amount of food from week to week, a farmer can actually make less money when production is good.

In sum: year after year, farmers rely on credit to get the season started; and year after year, the security of that initial investment isn’t guaranteed. Compared to most jobs with a steady paycheck, farming is risky business.

The squeeze…

Now consider what happens to this already tenuous situation when the market for your crop takes you on a virtual rollercoaster ride! This is exactly what happened to farmers this past season as a bushel of corn varied from a peak in June of $7.99 to just $3.64 in October (with wheat, soy, and rice following similar tracks). During the same time, farmers faced substantial hikes in the cost of production, with input costs, especially fertilizer and seed, continuing to skyrocket toward record highs. Nitrogen fertilizer, for example, is expected to increase by upwards of 60% next spring! The simultaneous decrease in income and increase in costs results in what’s called a price squeeze.

The crunch…

In normal conditions farmers rely heavily on credit, but when compounded by a price squeeze, the need for a stable and accessible credit system is greater than ever.

Farmers generally have three options for obtaining a loan – a commercial bank, the Farm Credit Service(FCS) or the Farm Service Agency (FSA). Comparatively, banks offer the majority of loans to farmers; but, as we know, today many commercial banks are facing a credit crunch and less tolerant of taking on risk. Due to Farm Credit Service consolidation in recent years, the FCS credit system has become less accessible in rural areas, with some criticism that the program is disproportionately benefiting the wealthiest and largest farms that need it the least. Generally, farmers must be turned away from both commercial lenders and the FCS in order for the Farm Service Agency guaranteed loan program to kick in. Considering the current economic climate, we can expect a good deal of pressure to be placed on the FSA in coming months.

One additional option in many states is a government-sponsored beginning farmer loan program. Such loans are critical to attract new farmers to farming, especially with affordable land prices and loans becoming even more out of reach. For more information on the availability of these programs in your area, contact your state’s Department of Agriculture.

Between a rock and a hard place…

Like many Americans and businesses grappling with the current credit crisis, farmers have been forced to downsize and delay major purchases. But the effects of the economic downturn run much deeper on the farm. With so much risk up in the air, it becomes difficult to make even the most basic business decisions: what to grow, how much and when.

So what can we do to help keep family farmers thriving during these trying times?

If you or a farmer you know is facing financial problems, the best thing to do is contact a banker who can help map out your options – and to do so early, before things grow too out of hand. Ask about the FSA guaranteed loan program or call your local USDA Farm Service Agency to find out how it works.

To locate a farm advocate working on financial counseling and credit issues, try searching Farm Aid’sFarmer Resource Network (FRN) at www.farmaid.org/ideas; or give us a call at 1-800-FARMAID and we’ll walk you through the process. With more than 75 groups in the FRN working on these issues, help may be just around the corner.

Buy locally. While localized markets and community-based food systems currently involve only a small fraction of farmers in this country, the model has many perks for farm economies, the environment and communities alike, including re-circulating more money within the local economy. Through continued consumer support of local markets, more and more family farmers and communities will be able to participate in their stability and viability.

And finally, as you consider end-of-year donations and holiday giving, think about donating to Farm Aidto help support our ongoing farmer referral work and the FRN.

As always, it’s important to recognize and celebrate the commitment that goes into growing the food that nourishes our nation. But in our especially fragile economy, let’s make sure not to forget about the stewards of our land, our farmer heroes, who are taking risks greater than ever to bring good food to the table.

Happy Holidays to all!

-Hilde

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