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Tight Credit Choking U. S. Hog Farms

Reduced lending in the wake of the financial crisis in the United States coupled with price volatility could bring some livestock producers to a “crisis point” next year, an economist told a seminar Nov. 2.

Danny Klinefelter, professor and extension economist at Texas A&M University, said tight credit could push some livestock farms out of business.

“There are going to be foreclosures on the livestock side, people either voluntarily liquidating or (being) forced to sell their operations,” Klinefelter told a seminar entitled Forces Driving the Ag Credit Market and Its Impact on Producers.”

The seminar was organized by the Chicago Mercantile Exchange, home to the livestock and grain futures markets.

Commodity prices soared last year as investors poured money into commodities. But then prices crashed as the credit crunch and recession took hold.

While U. S. grain prices have declined from record highs, they remain at historically high levels, with harvest delays fuelling gains along with another inflow of speculative money.

Besides high prices for feed, hog farmers have had to contend with import bans imposed by some countries during the H1N1 flu outbreak. Hog producers have suffered losses for about two years, with an industry group estimating the losses at above $5 billion.

Dairy farmers have seen milk prices pressured by a big world supply.

Klinefelter said both the hog and dairy sectors will be under pressure in 2010 as farm creditors tighten credit to limit risk and bolster reserves, and declining values for farmland add more financial pressure.

Land accounts for 87 per cent of farm assets, while property is often the chief collateral in any lending agreement, Klinefelter said.

Farmland values fell five per cent during the second quarter in Iowa, one of the top agriculture producers in the United States, according to the Federal Reserve Bank of Chicago.

Klinefelter said a “cleansing” of as long as three years typically follows long periods of big profits and expansions.

“The function of a competitive market is to drive the economic returns to the average producer to break-even,” Klinefelter said.

“The really top people are making money and growing, the average guy is hanging in there, but those not as successful are losing money and being forced to exit the industry.”

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