Nov 9, 2023

Ag Lender Survey: Liquidity tops lender concerns for producers

By: Tammie Sloup

Liquidity climbed to the top concern among agricultural lenders for their producer customers, with farm income levels coming in at a close second.

Rising input costs, previously ranked as the top concern in 2021 and 2022, dropped to the third highest this year, according to the 2023 Agricultural Lender Survey report produced jointly by the American Bankers Association (ABA) and the Federal Agricultural Mortgage Corporation, also known as Farmer Mac.

“After a record-setting year of farm income, producers have experienced some margin compression in 2023 and lenders are taking notice,” said Jackson Takach, Farmer Mac’s chief economist. “During economic cycle transitions, the fundamentals are increasingly important, and I think that’s why you see lenders rank balance sheet liquidity and farm income levels as their top concerns facing producers in the coming year.”

In its eighth year, the annual survey provides insight from agricultural lenders to gauge overall industry sentiment on the farm economy, expectations on land values, prospects for the coming year and issues facing the broader economy. Responses represent a range of institutions by size, from less than $50 million in assets to more than $1 billion, and by geography.

The various impacts of a rising interest rate environment were a common theme in the survey. Accordingly, interest rate volatility remained the No. 1 perceived concern facing lending institutions in 2023.

“After the Fed hiked rates 425 basis points in 2022 and an additional 100 basis points in 2023, it is no surprise that interest rate volatility remained the No. 1 concern facing ag lenders’ institutions,” said Tyler Mondres, senior director of research at ABA. “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.”

But the situation is starting to calm, Mondres said at the Agricultural Bankers Conference in Oklahoma City.

“We’re in a much stronger position now. But there’s still some concerns looking forward about what action the Fed is going to take,” he said. “If you look at Fed funds futures, most folks seem to think that we’ve reached a peak in the cycle that it’s not going to go above 5.25 to 5.5. But there’s still some uncertainty.”

Both short- and long-term interest rates have increased significantly in response to the 11 rate hikes and continued tapering of the Federal Reserve balance sheet. Based on Fed funds futures pricing in early October, markets largely believe the Fed has finished its hiking cycle but expect rates to remain elevated through the first half of 2024, according to the survey.

Profitability expectations

Ag lenders estimate more than three-quarters of their borrowers will remain profitable in 2023 and two-thirds will remain profitable through 2024. However, there was greater dispersion in responses regarding the level of overall farm profitability. Only 28% of lenders reported an increase in borrower profit margins, down from 66% last year. Lenders expect farm income compression over the next 12 months, with 70% projecting a decline in farm profitability.

That mild deterioration of profitability, however, follows record highs, coupled with an “inordinate amount of government support” during the pandemic. So essentially, Mondres said it’s more of a “return to the norm.”

Land value and cash rent expectations

Farmland values continued their upward march in 2023. Lenders’ perceptions of farmland values showed an increase of 11% in 2023, with some variation across regions. However, several tailwinds have turned to headwinds as incomes have declined and interest rates have increased. 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.

Loan demand increases

Ag lenders reported an increase in demand for both farmland and agricultural production loans in 2023. Respondents anticipate loan demand for both categories will continue to increase over the next 12 months.

“It’s still not to the level that it was from that 2016 to 2018 period,” Mondres said. “So, while we are still seeing positive loan demand in this category, it could go a lot further compared to what we’ve seen in historical years.”

Mondres added another component to think about is the reduction in profitability.

“If you have reduced profit margins, if profitability is starting to pull back, you have less money to funnel into your operations, you’re going to be a little bit more reliant on debt financing from a bank or another agricultural lender,” he said.

New loan approval rate

Lenders reported an average agricultural loan application approval rate for new loans of 86% in the 12 months leading up to August 2023 and expect the approval rate for renewal requests to be 89% in the following 12 months.

The survey also showed lenders’ recession concerns for producers declined in 2023 despite the economic volatility this year. Still, tighter monetary policy by the Federal Reserve that has helped slow down the broader economy has had an impact on the agricultural sector.

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