Energy costs could slow booming farm economy; so could tighter credit for loans on 2009 crops

"Soaring energy prices threaten to slow the booming farm economy," writes Jason Henderson, vice president and Omaha branch executive of the Federal Reserve Bank of Kansas City, in the latest edition of the bank's electronic newsletter, The Main Street Ecomomist. And since he wrote that, the credit crisis has surfaced, compounding concerns about energy costs.

Largely due to energy prices, mainly natural gas used to make fertilizer, input costs for American farmers in July were 20 percent higher than a year before. "Fuel prices also nearly doubled. Seed prices rose 30 percent. And chemical prices went up 12 percent," Henderson notes. That could make farmers ask for larger operating loans to plant next year's crops, at a time when the credit crunch may make agricultural lenders more stingy.

"Rising production costs have led to some deterioration in farm credit conditions," Henderson reports. "After improving over the past two years, farm loan repayment rates dropped sharply" in the bank's service region (Nebraska, Wyoming, Colorado, northern New Mexico, Oklahoma, Kansas and nearby Missouri). "Agricultural bankers indicated that farm loan demand increased sharply in the second quarter with further increases expected in coming months. As the demand for farm loans increased, agricultural bankers also reported a decline in funds available for farm loans." (Read more)