US crop prices soaring to historic levels

With US crop prices soaring to historic levels, times are seemingly good for grain farmers and agribusiness firms. So why are lenders worried about the US farm economy?
Despite the trappings of a "golden age" of agriculture, bankers and regulators are nervously watching two pressure points in farm finance - grain marketing and soaring farmland prices - in hopes that a rural credit crunch does not take root.
Ironically, high grain prices could be bad for farmers in at least one way. The recent doubling or tripling of grain prices from historical norms has thrown a wrench into a century-old system that farmers have used for selling grain and financing their production.
"As long as this price keeps trending up, the credit outstanding is enormous," said economist Mike Swanson at Wells Fargo, the largest private bank lender to US agribusiness. That credit crunch has broken down cash grain markets. For decades, farmers secured money for spring planting by selling crops "forward"-signing contracts with local elevators for harvest delivery. To protect itself, or hedge, the elevator sells Chicago Board of Trade futures contracts to lock in prices. Banks demand such hedges as loan collateral.
But in 2007 and again this year, the system has broken down. Grain firms that sold futures have watched prices soar to record highs-and then keep rising. To hold hedges, agribusiness companies have bled cash and borrowed hundreds of millions of dollars to keep paying "margin" - the good-faith payments needed to keep holding their "short" futures positions - to the CBOT.
Finally, early this year many country elevators as well as large grain buyers like Archer Daniels Midland Co and Cargill Inc told farmers they were unwilling to buy grain more than 60 days in advance. Their finances were stretched. The farmers, and farmer-owned co-operatives, would need to finance their own hedges.
One result: the government-linked Farm Credit System, the dominant lender to farmers and co-ops, saw credit demand in January-March 2008 surge $10 billion, up 7 percent from 2007, as more and more grain elevators asked for expansions on their lines of credit to hold short futures positions.
"The Farm Credit System is overall financially strong. We've seen the increase in demand coming from the Midwest because that's primarily where grain elevators are located," said Andrew Jacob, director of the Farm Credit Administration.