USDA watches for signs of credit crisis hitting ag

WASHINGTON (DTN) – Agriculture Secretary Ed Schafer said his department is carefully watching the potential impacts of the financial crisis on agriculture, particularly as commodity prices continue to drop.

Schafer, in an interview with DTN, said Monday that USDA is asking more questions about how the credit markets could affect farmers and businesses, such as grain elevators. If current conditions continue, elevators could face a credit crunch after more than a year of volatility and commodity prices that already have hurt the credit lines of grain elevators, particularly regarding margin calls on future contracts.

“We’re looking at several areas, not the least of which is the financial health of elevators,” Schafer said.

Schafer explained that the damage from storms and hurricanes this summer and early fall caused broad and widespread damage to crops. The last of those storms hit just as harvest began in some areas. “That is when farmers are most exposed. That’s when they have most of their dollars in the ground.”

Schafer said there are worries in those areas that farmers may have had future-delivery contracts that they now cannot deliver on. Those farmers may be forced to buy elsewhere to meet the delivery on the contract, which will be a challenge due to already low stocks.

“Where are they going to buy? If they do buy, or if they can’t buy, what’s the elevator going to do? They (the elevators) sold it on the other end,” Schafer said. “We see that could be backing up all the way up the line here and causing problems. It’s not there now, but it’s something we are trying to look out for, and prepare for, as things start getting screwy.”

Talking to agricultural lenders, Schafer said USDA officials have been assured they are strong and have received good incomes for the past two years. Farmers have bought down a lot of debt. There are good balance sheets in the farm-lending credit systems.

But while the lenders are saying that, Schafer said there is worry about what is seen going on out there, “from an elevator standpoint, and we are watching from a farm-credit, farm-banker standpoint.”

USDA is also talking to farmers about current prices and the challenges to buy and contract inputs, such as fertilizer, for next spring. As corn and soybean prices fell dramatically during the last two weeks, there are anecdotes that farmers could face planting at a loss next year. This is due to high input prices if commodity prices continue to take a beating tied to global economic conditions. December delivery corn on Monday, for instance, dropped limit down to $4.24 a bushel, compared to a recent high of $5.72 a bushel on Sept. 24.

“You can look at the numbers, and the only reason that farmers were staying ahead of the game was because commodity prices were staying ahead of the huge increase in inputs,” Schafer said. “The only hope we have got out there is oil continues to fall, and you are going to see a commensurate drop in the cost of energy and petro-chemicals that can keep your head above water for the commodity costs.”

But energy costs are going to drop much slower,” Schafer said. “Hopefully that balances out by the spring.”

A fear now in agriculture, as this financial crisis spreads globally, is how that may affect agricultural exports. The value of the dollar has actually increased against other currencies, which could hurt exports. Schafer, however, said global production is seeing a “tail off” in yield, while consumption continues to rise. That suggests to him that despite the economic challenges, other countries that struggle to produce food or feedstuffs will continue to seek more commodities.

“You have a concern about the value of the dollar, but on the other hand, we are producing food out there and other people aren’t … Me personally, I think exports are going to slow some, but they will continue on an upward trend,” Schafer said.

chris clayton can be reached at chris.clayton@dtn.com