Ag lenders: Interest rate volatility top concern in 2023
Michigan Farm News
Lenders expect that both short-term and long-term rates will continue to rise in the coming year, reflecting market expectations that rates could rise by another 100-150 basis points by the end of the first quarter of 2023, according to American Bankers Association Chief Economist Sayee Srinivasan.
If you’re concerned about where interest rates are headed, you’re not alone. Interest rate volatility is also the top concern facing agricultural lenders going into 2023, according to responses from more than 300 agricultural bankers to the 2022 Agricultural Lender Survey.
Produced jointly by the American Bankers Association (ABA) and the Federal Agricultural Mortgage Corporation, more commonly known as Farmer Mac, 49% of respondents ranked interest rate volatility among their top two concerns, up 35.5 percentage points from last year.
While increasing rates have helped bolster bank net interest margins, a combination of higher funding costs, fears of weakening loan demand and strong competition is expected to cut into rising yields, according to the report.
“Given the Fed’s clear signal that it expects to continue raising rates until inflation is contained, it’s fitting that ag lenders cited interest rate volatility as their number one concern,” said ABA Chief Economist Sayee Srinivasan.
“Lenders expect that both short-term and long-term rates will continue to rise in the coming year, reflecting market expectations that rates could rise by another 100-150 basis points by the end of the first quarter of 2023.”
Lenders cited inflationary pressure as a major for producers. Liquidity and farm income, two of the top two concerns in prior years, were the second and third greatest concerns this year, respectively.
Lenders remain comparatively more concerned about weather and less concerned about total leverage than in prior survey years, according to the report. Recession risk — a new category this year — was lenders’ fifth-highest ranked concern for producers.
By comparison, lenders ranked “a slowing economic recovery” near the bottom of their list of concerns for producers in 2021, according to Jackson Takach, chief economist at Farmer Mac.
“Many of America’s farmers experienced a strong recovery in 2021 and 2022, driven by higher commodity prices and robust sales,” Takach said. “Looking ahead, ag lenders are keeping a close eye on expenses, as feed, fertilizer, fuel, and other input costs remain elevated.”
Respondents’ level of concern for all categories of commodities fell this year. Lenders reported the highest levels of concern for the dairy, fruits and nuts, and beef cattle sectors, but concern for each sector showed improvement over 2021 levels. Lenders’ concerns declined for grains over the year.
For the second consecutive year, 66.3% of ag lenders reported that overall farm profitability increased in the last year, while 10% reported that overall profitability had declined.
Lenders expect conditions to deteriorate next year, with 52.6% projecting a decline in farm profitability in the next 12 months. However, this remains well below the 2016-2020 survey average of 82.3%.
Approximately four out of five ag lenders reported rising land values in 2022, consistent with results from the 2021 survey. However, a growing percentage of lenders expected land values to slow down (59.4%) or decline (12.7%).
Cash rents were also reported higher in 2022, with 72.2% of lenders reporting higher rents in their market areas and 43.2% of respondents expecting cash rents to continue to rise in the next 12 months, potentially adding to inflationary pressures for producers.
“Farmland, a significant store of wealth for millions of farm families, continued to appreciate in 2022,” Takach said. “Most ag lenders anticipate the growth of land values slowing in the coming year, likely in response to higher interest rates and higher farm expenses.”
Lenders’ top concerns after interest rate volatility are lender competition and weak ag loan demand, according to the report. Approximately one in three respondents ranked competition among their top two concerns, down 17 percentage points from last year.
More than three-quarters of respondents (77.5%) ranked the Farm Credit System as their number one competitor for agricultural loans. Concern about credit quality and ag loan deterioration, which was the number one concern in 2020, remained the fourth highest concern facing lenders in 2022.
According to the report, demand for loans secured by farmland increased in 2022 at about the same pace as in 2021. Demand for agricultural production loans also grew in 2022, reversing the downward trend reported last year.
However, demand for ag production loans remains below the 2016-18 survey average. Respondents anticipate that loan demand for both categories will continue to increase over the next 12 months.
Lenders also reported an average agricultural loan application approval rate for new loans of 86.0% in the 12 months leading up to Aug. 2022 and, on average, they expect the approval rate for renewal requests to be 92.2% in the following 12 months, likely due to strong conditions in the agricultural economy and a decline in lending activity due to higher rates.
Survey respondents across all regions continued to report lower ag loan delinquencies and charge-off rates in 2022. Lenders in the South and West states anticipate credit quality will deteriorate next year, while lenders in the Corn Belt and Plains regions expect quality to remain fairly stable over the next 12 months.
“Credit quality was excellent in 2021 and 2022, so it is to be expected that lenders would anticipate some deterioration in the coming year as the potential for a downturn grows,” Srinivasan said.
The annual ABA and Farmer Mac Agricultural Lender Survey report is a joint effort to provide a look at the agricultural economy and market forces from the unique perspective of ag lenders.
The responses came from a diverse set of institutions, ranging from those with under $50 million in assets to those with more than $1 billion in assets.
To view the full Agricultural Lender Survey Report, visit aba.com/agsurvey.
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