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Tuesday, October 21, 2008

Trouble down on the farm

The worsening financial crisis is making it harder and more expensive for farmers and cattlemen to borrow money to pay for feed, land and salaries. While the credit squeeze on the agricultural sector is buffered somewhat by subsidies and other federal assistance, the timing is nonetheless bad: the costs of fertilizer, fuel, seed and equipment have all risen sharply in recent years, and a global recession is on the horizon.

“Other than the sky is falling, I’m OK, I guess,” said West Texas rancher John Welch, who manages 10,000 head of cattle.

With confidence dwindling in borrowers’ ability to repay loans, banks are requiring more collateral and higher interest rates from crop farmers, ranchers and meat processors, said Carl Anderson, an agricultural economist at Texas A&M University. “The bankers are turning conservative.”

This is the toughest lending environment farmers have faced in about 25 years. At the same time, the agricultural sector has historically done better than other industries during a recession because of the local lenders’ familiarity with the area, the safety net provided through farm bill programs and producers having crop and revenue insurance coverage.

In response to the lending crunch, farmers and ranchers are expected to rein in costs wherever they can — whether it means using less fertilizer, restructuring debt or putting off new equipment purchases.

While the weakening global economy is putting downward pressure on fuel prices, it is also depressing the value of grains and livestock — and that will eat into farmers’ and ranchers’ pocketbooks. The upside for consumers is that food prices are likely to come down.

The agricultural sector won’t be frozen out of credit markets entirely. For starters, the industry’s traditional lenders — independent commercial banks — are on more solid financial footing than the country’s largest investment banks and commercial banks, which have suffered the most in recent months from mortgage-related losses.

Moreover, federal assistance programs put in place in response to the country’s farm crisis of 1919 are still active, helping the industry weather the current crisis.

Provisions in the Farm Bill, portions of which grew out of the Agricultural Adjustment Act of 1933, give the industry special access to government-backed loans that are nearly fully guaranteed by the U.S. Department of Agriculture’s Farm Service Agency.Historic intervention

Asset prices plunge and a panic sweeps through international markets. Congress enacts sweeping government intervention, putting aside faith in free markets to heal themselves.

Sound familiar? So went the farm crisis of 1919.

When the U.S. bailed out the agriculture sector in the early 1930s, it forever changed the business of farming. The interventions of the 1930s succeeded in their goal of smoothing out the farm sector’s booms and busts, said Neil Harl, an agricultural economics professor at Iowa State University. But farmers chafed under Depression-era programs that limited their planting acreage. Their resistance led to the 1996 Farm Bill, known as the Freedom to Farm Act, which aimed to return the farm sector to the free market.