Farm debt is surging in the US as several years of depressed grain prices have squeezed grower wallets, a trend that could reshape fertilizer buying and application habits.
Net farm income has dropped from its 2013 peak of $123bn to $63.1bn in 2018 and is expected to hit $69.4bn in 2019, according to the US Department of Agriculture (USDA), as grain production outpaces demand, leading to lower corn and soybean prices.
Growers struggling to continue operations added to overall debt, resulting in a surge in Chapter 12 bankruptcy filings. Chapter 12 — a form of reorganization specifically for farmers — grew by 32pc from the 2017 to 2018 federal fiscal years in the US seventh and eight judicial circuits, representing Corn Belt states,Arkansas, Nebraska, the Dakotas and Wisconsin.
Farm debt is forecast to grow to a record high $426.7bn in 2019, thehighest since the USDA began record keeping in 2012. Working capital — the difference between the value of assets that can be easily converted to cash and debt due within the next 12 months — is expected to shrink by 25pc in 2019 to $38bn, a seven-year low, according to the USDA.
"I think the working capital issue is directly tied to bankruptcies," USDA senior economist Carrie Litkowski said. "If [working capital] continues to go down it might lead to more bankruptcies."
‘A new normal'
Grain and oilseed farmers have weathered several years of declining product prices as production outstrips demand, and may have more years of the same ahead. Corn growers have endured sub-$4/bushel prices at the farm gate since August 2014, according to USDA data, and are expected to see $3.40-$3.70/bushel in 2019. Soybean farmers have faced sub-$10/bushel since August 2016 and are expected to see $8.35-$8.85/bushel in 2019.
Lower grain values have been driven by production outpacing demand. Corn growers have averaged about 91mn acres of corn during 2010-18, with soybean area rapidly rising above 80mn acres since 2013. The USDA expects domestic growers in 2019 to plant 92.8mn acres of corn, maintaining a growth trend, while soybean acreage will drop to 84.6mn amid the ongoing trade war between the US and China.
Michael Langemeier, professor of agricultural economics at Purdue University, cites stronger demand amid rapid expansion in the domestic ethanol industry as a factor driving elevated acreage, which has fostered a "new normal" for farmers. But corn demand for ethanol production has plateaued in recent years and inventories have grown in tandem. Corn stocks in March were estimated at 8.6bn bushels, or 218,576 tonnes, according to the USDA. Corn stocks have risen by 62pc from a year ago, and are more than double their 2010 levels, which lowers market prices.
Altering fertilization
Consecutive years of depressed income and narrow margins could reshape when farmers apply fertilizers. Growers could reduce applications during the fall after harvest and increase rates during the spring prior to and after planting to ensure nutrients are being consumed by the plant and not lost.
Buying fertilizer as neededallows farmers to minimize their financial risk, especially booking volumes when fertilizer prices typically reset during the summer and winter.
"We are doing a much better job with spoon-feeding the crop," said Langemeier. "You can't afford to take the chance you're going to lose part of the benefit from the fertilizer by putting it on too early or putting it on in the fall, particularly as the cost increases a little bit."
Delaying purchases of nitrogen fertilizer could also allow flexibility in choosing the upcoming crop mix as corn and soybeans become increasingly competitive.
