Tight credit could nip farm sector: USDA's Schafer

By Charles Abbott

WASHINGTON (Reuters) - Tighter credit could throw a wrench in the booming U.S. farm sector, although there is no sign of distress from the turmoil on Wall Street, Agriculture Secretary Ed Schafer said on Wednesday.

By many measurements, the farm sector is strong. Net farm income, a gauge of profitability, is forecast for a record $95.7 billion this year, up 10 percent from 2007.

Land values are rising, farm exports are setting records and the debt-to-asset for the sector is 9 percent, down from 11.3 percent in 2004.

"We could see tight credit markets having an effect on agricultural production," Schafer said during an impromptu session with reporters.

"It's something we're watching. It's something we're concerned about. There is nothing out there that says it's going to happen."

The leader of the National Farmers Union, Tom Buis, told reporters, "Any time the cost of credit goes up, that adversely affects farmers."

Earlier in the day, the Federal Agricultural Mortgage Corp raised $65 million in capital by issuing senior preferred shares. All but $5 million came from member banks of the Farm Credit System, a major agricultural lender. Both entities are federally chartered.

Farmer Mac was created to establish a secondary market for rural real estate and rural housing mortgages and rural utilities loans. Farmer Mac needed capital due to losses on Fannie Mae stock and Lehman Brothers Holdings Inc securities.

Buis said Farmer Mac's losses created unease in the farm sector. Nor was it clear how widespread the financial crisis would become, he said.

"My understanding is the financial lenders in rural America are very strong," Buis said. "We hope it doesn't spread."

Interest rates on price-support loans by the Agriculture Department fell by one-quarter percentage point for loans made in October. The loans, which use crops as collateral, can be a short-term financing tool for growers.

During a telephone news conference, Buis said USDA ought to set a strong benchmark for the new Average Crop Revenue Election program, a revenue-protection plan that will be offered for 2009 crops.

USDA's decision will make "a tremendous difference" in the value of the new safety net, he said.

"We could be paying massive amounts of dollars that the taxpayers weren't expecting us to do," said Schafer. "We're trying to find the right balance."

A University of Missouri think tank says $1 billion a year in potential payments hinge on whether USDA bases the benchmark on average crop prices in 2006 and 2007 or the average of record-high 2008 and 2009 prices.