For three decades, the cycle was predictable: Farmers would use money from the sale of crops harvested in the fall to pay down their debts during the winter. But this year the pattern broke. Farm debt increased during the first quarter, said the Federal Reserve in a report that pointed to trade disputes and burdensome crop stockpiles as the likely causes.
“Increased lending on farm operations comes amid increasing risk in the agricultural sector, as expectations of large supplies and trade disputes have contributed to sharp declines in June of prices for most agricultural commodities,” said the Ag Finance Databook compiled by the Kansas City Federal Reserve Bank. The report looks at the farm sector nationwide.
President Trump threatened to expand U.S. tariffs to cover every item imported from China during a CNBC interview over the weekend. So far, the United States has imposed tariffs on $34 billion of high-tech Chinese-made imports, soon to rise to $50 billion. China responded to U.S. tariffs on imported steel, aluminum and the high-tech products with retaliatory tariffs on U.S. ag exports – soybeans, wheat, beef, pork, poultry, corn, sorghum, cotton, fruits and nuts – and an array of other U.S. products.
“Farm debt at commercial banks … increased from the fourth quarter to the first quarter for the first time since quarterly information was collected in 1987,” said the databook. “Loan volumes typically decrease in the first quarter as farmers pay down annual operating lines following seasonal harvest in the fall. More crops in storage seem to have contributed to a shift from typical seasonal trends as farm debts in the first quarter increased 0.2 percent from the previous quarter.”
Growers have reaped a string of bumper corn and soybean crops since 2012, pushing up the size of U.S. stockpiles and weighing on commodity prices. Futures prices for corn and soybeans fell steeply in June as the U.S.-China trade dispute intensified and Canada, Mexico and the European Union announced retaliation for tariffs on their steel and aluminum exports.
“Although record levels of crop production have contributed to growing inventories, it also appears that producers are storing larger quantities of grain and oilseeds through the end of the year in hopes that prices will rise,” said the Kansas City Fed.
Following the unusual increase in farm debt in the first three months of this year, lending activity increased slightly in the second quarter as well, led by larger loans on livestock, said the regional Fed. Livestock prices were up this spring, which meant producers needed more money to buy animals. In the longer run, the average size of livestock loans is on the rise, suggesting consolidation has resulted in fewer farms with larger needs.
Farmland values are “relatively steady,” said the bank. “The higher demand for farm loans has led to lower liquidity at agricultural banks and at the same time, agricultural lenders have continued to report lower rates of repayment and interest rates have continued on an upward trend.”
Farmers voted in landslide proportions for Trump and generally have stood by the president, although concern is growing over how long trade disruptions will last. However, farm leaders pounced when White House trade adviser Peter Navarro said, “The amount of trade we’re affecting with tariffs is a rounding error” compared to the size of the U.S. and Chinese economies.
Navarro is “out of touch with the pain our farmers and ranchers are experiencing,” said president Zippy Duvall of the American Farm Bureau Federation. “The nation’s farmers and ranchers support the broader goal of strengthening our overall economy and trade balance, but not at the risk of long-term, irreparable harm to our ag exports and the jobs they create.”