Hurricane Katrina did not drop much rain on the Plains states, but farmers there are feeling the storm’s aftereffects.
Soaring fuel prices have suddenly made harvesting crops more expensive, and the closing of New Orleans’ port has shut down a key hub for farm exports. With many farms operating on razor-thin profit margins, agricultural bankers say the one-two punch could force some farms out of business.
“If your marginal costs are too high, you just quit producing,” and some will probably leave farming, said Steven J. Handke, the president and chief executive of the $88 million-asset Union State Bank in Everest, Kan.
Bankers say they are working with farmers to move their crops through alternative channels and advising them to lock in prices using futures contracts, which would guarantee a certain level of income. They expect that many of these customers will need to refinance operating loans they took out earlier this year to cover harvesting costs.
Another worry is that farmers in general and grain farmers in particular could be in a worse borrowing position next spring.
The Mississippi River is the primary route grain farmers in eastern Iowa, western Illinois, eastern Missouri, Wisconsin, and Minnesota use to move their crops to the port of New Orleans.
Michael Swanson, the agricultural economist for the $388 billion-asset Wells Fargo & Co. in San Francisco, said the laws of supply and demand would drive prices down if the port remains closed and no other outlet can be found for grain that normally flows down the Mississippi.
“If the local elevators can’t move this grain, of course they aren’t going to offer you a good price,” he said.
And if crop prices fall and energy costs do not come down, bankers say farmers will need larger loans for operations that are likely to be less profitable than in years past.
“The increasing energy cost, not only just for fuel and gas, also trickles down to the cost of fertilizer. That’s definitely going to have an impact to the bottom line for farmers,” said Dan K. Coup, the president and CEO of the $37 million-asset First National Bank in Hope, Kan.
Higher energy prices are already taking a toll on farmers.
Mr. Handke said that the price of fertilizer, which is made with natural gas, has increased dramatically in the last 10 days, and that as a result the cost to fertilize 1,000 acres of corn could increase by as much as $25,000 for next year’s crop.
Despite these concerns, bankers say that many farmers started the year with strong balance sheets, and that these farmers in particular should be able to get by.
Dennis Hackett, the president of rural lending for the $7 billion-asset First Midwest Bank in Itasca, Ill., said First Midwest is working with farmers to help them find other means of transportation, such as rail, and use futures contracts. He said the hurricane would not change First Midwest’s strategy as a whole.
“Is it going to affect whether we lend money to agriculture? No,” he said.
Mark R. Drabenstott, the director of the Center for the Study of Rural America at the Federal Reserve Bank of Kansas City, said it was too soon to be sure how this would affect the overall farm economy.
He said factors include a farm’s location and what it produces. For example, livestock producers would benefit from a drop in grain prices.
“The other side of this, of course, is that producers in most of these areas that could be affected by lower grain prices have seen very significant gains in land values over the last couple of years,” Mr. Drabenstott said. “They have somewhat of a cushion as they see their incomes deteriorate.”
Joseph P. Kennedy, the president of the $29 million-asset First National Bank in Frankfort, Kan., said high land prices could help farmers by allowing them to use their land as collateral for loans. But agricultural bankers generally lend on cash flow so that farmers are not put in the position of having to sell their land to pay off their bank loans.
“They do have some equity in their land, but that is the last resort,” Mr. Kennedy said.
Mr. Coup said his attempt to gauge the long-term effects on his farmers includes figuring out how long it will take to reopen the ports and oil supply lines.
“We have to take those things into consideration when we start making plans for the coming year,” he said.
Wells Fargo’s Mr. Swanson said bankers should work with farmers to make sure they are Loan Marketing Payments and other government programs that guarantee farmers a certain level of income.
His advice to bankers and farmers alike is not to do anything prematurely, because the port could be reopened very quickly.
“Give it two weeks and see what happens,” he said.
