U.S. farm equipment loans backing ABS will come under increasing stress this year from higher diesel and fertilizer costs as a result of supply disruptions due to the Iran conflict, according to Fitch Ratings. Nevertheless, Fitch does not expect any rating changes due to strong transaction structural features that protect ratings against weaker asset performance.
Roughly one-third of global seaborne fertilizer trade moves through the Strait of Hormuz, which is effectively closed while hostilities persist. The timing is especially adverse for U.S. farmers because it coincides with the spring planting season and peak fertilizer demand.
Prices for imported urea, a key nitrogen fertilizer, rose by 41% the week of April 13 compared with the week of Feb. 16, according to DTN, a farm market data provider. This reflects a reduction in fertilizer and natural gas shipments from the Middle East as well as limited storage capacity for products that cannot be exported. Farmers also face higher equipment prices, which have risen with higher U.S. tariffs.
Farm margins are at risk of compression from higher costs, especially when they coincide with weak crop prices or lower yields. Margin pressure and/or higher debt would weaken borrower repayment capacity and may result in higher agricultural equipment ABS delinquencies and defaults. Effects on farmers’ credit profiles and ABS performance may be either delayed or mitigated if farmers are able to rely on fertilizer inventories to carry them through the current planting season.
The U.S. Department of Agriculture is providing $12 billion in one-time bridge payments to farmers to help address increased production costs. The support provides some liquidity relief but is likely to be quickly absorbed by higher input prices.
The ‘deteriorating’ asset performance outlook for the equipment ABS sector, first assigned in Fitch Ratings’ December 2024 outlook, reflects growing macroeconomic pressures that negatively affect commodity prices and input costs for farmers. Fitch expects delinquency and default levels to keep rising as economic growth slows.
Despite these challenges, Fitch’s equipment ABS ratings have stable or positive rating outlooks due to robust ABS structures that mitigate performance deterioration by facilitating rapid growth in credit enhancement. Transaction structures also incorporate excess spread to offset unexpected losses, and most contain events of default that could trigger rapid principal paydown. Some transactions also have performance-related delinquency and loss triggers that protect rated notes.
Fitch has increased expected losses on ABS transactions when warranted by performance trends for both new and surveilled transactions.
