Ag lenders smell opportunity — and risk — in rising fertilizer prices

Lofty prices for crops such as corn and soybeans fueled agriculture profits in 2021. But inflation is now driving up fertilizer costs, threatening to end farmers' strong run as the spring planting season approaches.

This creates a mixed outlook for agriculture banks this year: Farmers likely will need to borrow more to cover higher costs, driving up loan demand. But some of those same customers could struggle to stay in the green and cover their loan payments.

“It’s a bit of a mixed bag right now,” Dave Kusler, president and CEO of the $60 million-asset Bank of Hazelton in North Dakota, said in an interview. “We expect to see some notable loan growth by spring — and that’s usually a good thing — but this time it looks to be as much about inflation as anything else.”

The cost of fertilizer more than doubled in 2021, reflecting in large part a global shortage of chemical ingredients imposed by pandemic-era supply chain disruptions, according to the U.S. Department of Agriculture. Spikes in natural gas prices amid soaring demand for the heating fuel this winter have exacerbated the challenge. Gas is used in nitrogen-based fertilizers. What’s more, China last year ceased exports of phosphate, another key fertilizer ingredient.

Bloomberg

Overall U.S. inflation in 2021 surged to the highest level since the 1980s. Fertilizer prices, one of farmers’ biggest expenses, continue to climb, bankers said in response to Creighton University’s monthly survey of agriculture lenders throughout the Midwest.

“Inflation is a serious problem here,” said Jim Eckert, president and CEO of the $29.4 million-asset Anchor State Bank in Anchor, Illinois.

A Purdue University survey of farmers in January found that 57% expect input prices — namely fertilizer — to rise by 20% or more in 2022; 34% said they expect prices to shoot up 30% or more. Nearly one out of three surveyed said they will have to borrow more to cover the cost increases.

The disruptions extend not just to input pricing, but also availability. Nearly 30% of those surveyed by Purdue said they had difficulty purchasing crop inputs from suppliers for the 2022 planting season.

This comes amid hints of wilting crop demand.

Supply chain challenges have lessened Chinese demand for U.S. crops, said Dan Kowalski, vice president of the $155 billion-asset CoBank in Denver, citing January data. Combined corn, soybean and wheat shipments to China late in 2021 were down by a third from the prior year, a potential threat to the recent strength in commodity prices, he said.

While the pandemic’s impacts have eased since the worst shocks of 2020, Kowalski said, “economic risks from new, high-impact coronavirus variants will remain throughout 2022.”

Bankers say their farm clients likely will either have to borrow more to keep pace with soaring costs or scale back crop production, and either scenario could cut into profitability after a stellar 2021 fueled by spikes in commodity prices. Corn prices, for example, climbed more than 30% last year. The USDA estimated farmers collectively earned $117 billion in 2021, up 23% from the previous year and the highest level in eight years.

The Creighton University survey in January showed declining confidence among bankers in the agriculture economy. Its index — which ranges between 0 and 100 with a reading of 50 representing expectations for growth — came in at 61.1 last month, down from December’s 66.7. Creighton economist Ernie Goss said the result was still positive, but sentiment is trending lower amid inflation worries.

“Solid grain prices, the Federal Reserve’s record-low short-term interest rates, and growing agricultural exports have underpinned” the rural economy, he said. But bankers “overwhelmingly” named rising fertilizer costs a major threat and top concern for the year ahead. Bankers ranked disruptions of the delivery of farm inputs and the likelihood of rising interest rates as the second and third greatest threats to farm operations, he said.

Federal Reserve policymakers said last week they were likely to begin raising interest rates in March. This would make borrowing more expensive for farmers.

Kusler said stronger credit demand is welcomed, given that loan growth was difficult to generate in 2021. Farmers were flush with cash after a strong summer crop that fetched high prices. U.S. ag loans totaled $177 billion in the third quarter of 2021, the most recent time period for which final data is available. That was down 2% from a year earlier, according to S&P Global.

At the same time, banks do not want to sacrifice pristine credit quality to produce growth, Kusler said. Loans 30 days or more past due accounted for just 1.4% of total agriculture loans in the U.S. in the third quarter. That was the lowest since 1.2% in the final quarter of 2015, the S&P data show.

“We’re here to help farmers manage through this,” Kusler said, “but we’ll be moving ahead with cautious optimism.”