Wednesday, January 7, 2009

Farm-Credit Squeeze May Cut Crops, Spur Food Crisis

Farm-Credit Squeeze May Cut Crops, Spur Food Crisis
By Carlos Caminada, Shruti Singh and Jeff Wilson
http://www.bloomberg.com/apps/news?pid=20601087&sid=a.YrOnFi9aJM


(Bloomberg) -- The credit crunch is compounding a profit squeeze for
farmers that may curb global harvests and worsen a food crisis for
developing countries.

Global production of wheat, the most-consumed food crop, may drop 4.4
percent next year, said Dan Basse, president of AgResource Co. in
Chicago, who has advised farmers, food companies and investors for 29
years. Harvests of corn and soybeans also are likely to fall, Basse
said.

Smaller crops risk reviving prices of farm commodities that sank from
records in 2008 after a six-year rally that spurred inflation and
sparked riots from Asia to the Caribbean. Futures contracts on the
Chicago Board of Trade show wheat will jump 16 percent by the end of
2009, corn will rise 15 percent and soybeans will gain 3 percent.

``The credit situation is worrying even the biggest and best
farmers,'' said Brian Willot, 36, a former University of Missouri
commodity analyst who now grows soybeans on 2,000 acres in Brazil.
``For the financially weak, credit has dried up completely. For the
strong, credit has been delayed and interest rates are higher.''

The number of hungry around the world is at risk of increasing as the
financial crisis cuts investment in agriculture and crops, said
Abdolreza Abbassian, secretary of the Intergovernmental Group on
Grains at the United Nations Food and Agriculture Organization in
Rome. The total increased by 75 million last year to 923 million, the
UN estimates.

Brazil Squeeze

``The net effect of the financial crisis may end up being lower
planting, lower production,'' Abbassian said. ``More people will go
hungry.''

In Brazil, the world's third-biggest exporter of corn after the U.S.
and Argentina, production may fall more than 20 percent because
farmers can't get loans to buy fertilizer, said Enori Barbieri, a
National Corn Producers Association vice president. The nation's
coffee harvest, the world's largest, may drop 25 percent for the same
reason, said Lucio Araujo, commercial director at farmer cooperative
Cooxupe, located in Guaxupe.

Borrowing costs increased and farmers struggled to get loans after
the worst financial crisis since the Great Depression made banks and
grain processors, including Cargill Inc. and Archer Daniels Midland
Co., less tolerant of risk.

Minnetonka, Minnesota-based Cargill and Decatur, Illinois- based
Archer Daniels, the world's largest grain processors, are among the
crop buyers to halt financing for growers in Brazil, said Eduardo
Dahe, who represents the companies as president of the National
Association of Fertilizer Distributors.

Lending `Stopped'

Processors usually cover half the financing needs of farmers by
accepting part of the future crop as payment. ``No one is doing it,''
Dahe said. ``It's stopped.''

In Russia, loan rates for farmers have jumped by half in some cases
to more than 20 percent in the past few months, Arkady Zlochevsky,
president of the Russian Grain Union, said in an interview earlier
this month.

While the credit squeeze gripping emerging markets has yet to hurt
the U.S., the risk remains, Agriculture Secretary Ed Schafer said
Oct. 1.

``We certainly could see tight credit having an effect on
agricultural production,'' Schafer said in Washington. ``The costs of
farming operations today are huge, and that backs up to the banks
that have balance sheets that are tight, it backs up to elevators
that have credit stretched out.''

Farm Incomes

To be sure, farmers in the U.S., the world's largest grain exporter,
may have enough cash to avoid production cuts through next year
because of this year's record profits.

Net farm income will rise 10 percent this year to $95.7 billion, the
U.S. Agriculture Department estimated Aug. 28. While farm debt jumped
7.7 percent last year to $211 billion, the total is 9.6 percent of
assets, a ratio that the government forecast on Aug. 28 will drop to
8.9 percent this year, the lowest level since at least 1960, the
earliest data available.

``I don't see the crisis'' for U.S. farmers, said Corny Gallagher,
who helps oversee $20 billion in global agribusiness and food-product
loans for Bank of America Corp. in Sacramento, California. ``While
commodity prices are down from their peak, they are still relatively
high.''

Warning signs are appearing.

`Deteriorating' Conditions

Global inventories of corn, wheat and soybeans before the harvest in
the Northern Hemisphere next year will be the second- lowest since
1974, enough for 67 days of consumption, compared with 144 days of
supplies in 1986, U.S. data show.

``Stockpiles are going to be extremely tight,'' said AgResource's
Basse. ``The world cannot afford any dislocation in production next
year, or there will be a real shortage.''

The Federal Reserve Bank of Kansas City said Aug. 15 that credit
conditions in the second quarter, the most recent data available,
``showed signs of deterioration'' in the seven-state region that
includes Kansas, the biggest U.S. producer of winter wheat. Loan-
repayment rates fell for the first time since 2006 as wheat slid 7.6
percent in the quarter. Wheat lost another 41 percent since then.

``This year is going to be the best year ever and now we are looking
at the potential to give it all back in 2009 if prices don't rise
above the expected cost of production,'' said Mark Kraft, 49, who
grows corn and soybeans in Normal, Illinois. ``You have to hope that
fertilizer, seed and land rents come down and the price of corn
improves.''

Lower Prices, Higher Costs

Wheat fell to $5.1625 a bushel on the Chicago Board of Trade on Oct.
24, touching a 16-month low of $4.965. On Feb. 27, it reached a
record $13.495. Corn fell 7.5 percent last week and touched a one-
year low of $3.64 a bushel today, compared with a peak of $7.9925 on
June 27. Soybeans fell 4.4 percent last week to $8.67 a bushel and
are down 47 percent from a record $16.3675 on July 3. Rough-rice
futures are down 41 percent to $14.685 per 100 pounds from $25.07,
the highest ever, on April 24.

One 80,000-kernel bag of Monsanto Co. corn seed, enough for about 2.5
acres, rose 45 percent this year to $320, the same amount Midwest
tenant farmers paid to rent an acre of land, Kraft said. A gallon of
diesel for tractors averaged $4.47 in the third quarter, up 51
percent from a year earlier, according to AAA, the largest U.S.
motorist organization.

The value of the collateral farmers use to secure loans -- crops and
land -- is diminishing. Lenders are demanding more equity for farm
loans used to run operations or acquire land and equipment.

``We need two to three times the amount of money we used to need with
the same collateral,'' said Bo Stone, 37, a seventh- generation
farmer in Rowland, North Carolina. ``It means we have way more risk
than we've ever had. This is a time where one bad crop year, with the
amount of money and input tied up, could potentially cost you your
equipment, land and livelihood.''

To contact the reporters on this story: Carlos Caminada in Sao Paulo
at at ccaminada1@bloomberg.net; Shruti Date Singh in Chicago at
ssingh28@bloomberg.net; Jeff Wilson in Chicago at
jwilson29@bloomberg.net.

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