As Kentucky producers begin to plan for the 2009 growing season, they face several economic challenges that could stymie their ability to obtain operational loans and impact their decisions on which crop to grow.
For a second year in a row, a lengthy drought affected Kentucky's growing season, resulting in many crops not producing the yields that farmers expected. Commodity prices are volatile and considerably lower than this summer's prices.
While there is speculation that fertilizer costs will drop before spring, input costs remain very high.
"It is a very stressful time in agriculture. We're in new territory," said Rick Costin, Kentucky farm business management specialist in the University of Kentucky College of Agriculture. "Each individual situation is different. Farmers will have to make decisions based on their production history, market prices and input costs. One size does not fit all."
There is credit available for operating loans. Costin said many farmers tend to apply for loans at smaller, community banks. These banks were not affected as badly by the sub-prime mortgage crisis as larger national institutions.
While credit is available, producers should know that financial institutions will be tightening their lending practices for several reasons during the upcoming year. Producers will need larger operating loans this year due to higher input costs.
With the country's financial situation, lenders are going to be more conservative and seek more stability and security from producers. Many financial institutions will require more collateral and documentation from producers than in the past.
Farmers who are cash-strapped or have a limited amount of assets may have to shop around to get operating loans.
Costin said interest rates on operating loans will likely go up this year due to banks need for security. However, rates will vary between different institutions. Costin encourages producers to shop around for the best rates.
In addition to the credit situation, the volatile markets and input costs have raised questions for producers on whether to grow corn or soybeans in 2009.
"When selecting a crop, I encourage farmers to do budgets for each, but be prepared to change their budgets weekly, and maybe even daily, as commodity prices and input costs continue to fluctuate," he said. "A few weeks ago, soybeans looked liked they would be more profitable to grow than corn, but that may not be the case if input costs drop."
Last week, urea dropped more than $200 a ton. Some producers are hopeful that other input costs will continue to decline into the spring and are putting off prepaying until after the first of the year.