Nov 10, 2023

Inflation, liquidity top ag lending concerns

Interest rate volatility was the most pressing issue for ag banks this year, according to the 2023 Agricultural Lender Survey from the American Bankers Association and Farmer Mac.

ABA Senior Director of Research Tyler Mondres attributed interest rate concerns to the Federal Open Market Committee’s numerous rate hikes since March 2022. “While elevated rates have not depressed loan demand, it drove deposit costs to a decade-long high for ag banks in the second quarter of 2023,” he added.

Released Nov. 6, the survey included responses from more than 260 lenders of institutions ranging from less than $50 million in assets to more than $1 billion. More than half of respondents said they were concerned about dairy as export markets have softened for both this year and in 2024 due to a drop in export demand and from competitive international prices. Nearly a quarter of respondents expressed similar worries for swine. According to the National Pork Producers Council, hog and swine prices have increased over the past three months but remain below year-ago levels as high production costs continue to limit profitability.

Ag lenders estimated that more than 75 percent of their borrowers would be profitable this year, while two-thirds estimated their borrowers will remain profitable through 2024. However, only 28 percent saw an increase in borrower profit margins, down from 66 percent in 2022. According to the U.S. Department of Agriculture, net farm income is forecast at $141.3 billion this year, down nearly 23 percent from 2022.

“Lenders expect farm income compression over the next 12 months, with 70 percent projecting a decline in farm profitability,” the ABA stated.

Respondents reported a drop in ag loan delinquencies and charge-off rates this year. More than 40 percent tightened underwriting standards and loan terms this year, up from 30 percent and 22 percent, respectively, in 2022.

Lenders reported an increase in demand this year both for loans secured by farmland and agricultural production loans. The average agricultural loan application approval rate for new loans was 86 percent in the last 12 months leading up to August, and is expected to grow to 89 percent in the coming 12 months.

Agricultural credit quality remained strong this year despite margin compression, Mondres said. “Lenders expect a return to trend for credit quality in the coming year, which was reflected in a moderate increase in concern for ag loan deterioration,” he added. “While lenders are taking prudent risk management steps in response, such as reviewing underwriting standards and loan terms, they are prepared to continue providing critical support to America’s farmers and ranchers.”

Lenders’ perceptions of farmland values revealed an 11 percent increase in 2023. “Several tailwinds have turned to headwinds as incomes have declined and interest rates have increased,” the ABA stated. “As a result, most lenders expect land values will remain stable over the next year. Cash rents, meanwhile, have been slower to increase and could rise further in 2024.”

Lenders listed liquidity and farm income as the primary concern among ag producers, closely followed by farm income levels. Rising interest costs, which was the most-pressing producer issue in 2022, fell to the third most-pressing problem this year. “Recession risk remained a middling concern for lenders despite worries about an economic slowdown over the coming year,” the ABA stated.

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