Interest rate volatility concerns ag lenders
By: Carol Ryan Dumas
The top concern facing agricultural lenders going into 2023 is interest rate volatility, according to a new survey.
Nearly half of respondents — 49% — ranked interest rate volatility among their top two concerns, up from 35.5% last year, according to the 2022 Agricultural Lender Survey report produced by the American Bankers Association and the Federal Agricultural Mortgage Corp., more commonly known as Farmer Mac.
“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,” Sayee Srinivasan, ABA chief economist, said in a press release.
“Lenders expect that both short-term and long-term rates will continue to rise in the coming year … ,” he said.
Their other top concerns included lender competition, weak loan demand and credit quality and loan deterioration.
When it comes to their concerns for producers, inflationary pressures topped the list.
Liquidity and farm income, two of the top two concerns in previous years, were the second and third greatest concerns, respectively.
Weather was the fourth highest concern, and farm labor availability came in fifth.
Recession risk, a new category this year, was lenders’ sixth 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.
“Many of America’s farmers and ranchers experienced a strong recovery in 2021 and 2022, driven by higher commodity prices and robust sales,” said Jackson Takach, chief economist at Farmer Mac.
“Looking ahead, ag lenders are keeping a close eye on expenses, as feed, fertilizer, fuel and other input costs remain elevated,” he said.
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 notably declined for grains over the year.
For the second consecutive year, most ag lenders — 66.3% — reported that overall farm profitability increased in the last year. About 1 in 10 lenders reported that overall profitability 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 4 out of 5 ag lenders reported increasing land values in 2022, consistent with results from the 2021 survey. However, 59.4% of lenders expected land value increases to slow down, and 12.7% expected them to decline.
Cash rents were 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,” Farmer Mac’s Takach said.
“Most ag lenders anticipate the growth of land values slowing in the coming year, likely in response to higher interest rates and potentially higher farm expenses,” he said.
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