It's common for farmers to finance their spring start-up costs by borrowing money. Bankers approve the borrowed funds based on a farmer's current debt and the forecasted crop yield and prices, hence the forecasted income of the farm and the likelihood of a loan's repayment. Foley and other bankers throughout the state will likely soften the lending criteria next spring, but that still might not ease requirements enough to allow credit to be extend to everyone who needs it. Slackening the borrower requirements isn't the best option either since it pushes interest rates higher due to the increased chances of loan default. Minn. Peterson explained that a greater number of farmers will face bankruptcy if crop reserves aren't reduced and prices stay stuck in the basement.
Most farmers use borrowed funds to cover only a small percentage of their expenses.
If those farmers carry over debt from this year, he said, they are likely to face tougher scrutiny when they apply for loans next year. If the funds aren't granted, it's likely that loan-dependent farmers will have to close up shop. Still, farmers have a better chance of staying in business now than during the 1980s crisis when farmers laden with debt and high interest rates had to sell off their land to pay off loans, said Sung Won Sohn, senior vice president and chief economist at Wells Fargo Bank in Minneapolis. Federal aid provided by the omnibus spending bill Congress passed late last month will help alleviate the burden on farmers, Peterson said. But even that funding might not save all farmers from calling it quits.