Banks and Banking & Finance and Agriculture/Farming and Energy & Environment and Loans

Farm-profit volatility boosting risk for lenders, economist says

November 9, 2011

U.S. farmers face increased financial risk because of higher operating costs and volatile commodity prices, even as income this year reaches a record, said Michael Boehlje, an economist at Purdue University.

“We’ve seen a combination of more price volatility, but we’ve also seen cost volatility that we didn’t see in that prior 15 years,” Boehlje said Tuesday at an agricultural banking conference in Indianapolis. The volatility of profit margins over the last five years is three times what it was during the prior 15 years, he said.

Farm lenders may have to increase requirements for working capital because there are more “fluctuations in potential income,” he said. Land prices and cash rents are up, the operation cost per acre has tripled, and fertilizer and seed chemicals have doubled for grain operations, he said.

With the operating risk for farmers increasing “dramatically,” lenders “have to be much more cautious than you might have been in the past on financing,” Boehlje said. “You have to be much more conservative on the financing side, which implies that you need to be conservative in how willing you are to finance.”

While profit margins for farmers will be a little lower in 2012 than current levels, they will remain above those of the last 20 years, he said. The U.S. Department of Agriculture anticipated record farm income this year of $103.6 billion.

“What I worry about is that when we fast forward to 2012 and actually have a crop harvested, I am not convinced that those margins will be there,” Boehlje said.

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