The highest concern going through agricultural lenders going into 2023 is rate of interest volatility, in accordance with the 2022 Agricultural Lender Survey report produced collectively by the American Bankers Affiliation and the Federal Agricultural Mortgage Company, extra generally referred to as Farmer Mac.
Survey outcomes confirmed practically half of respondents (49.0%) ranked rate of interest volatility amongst their high two considerations, up 35.5% factors from final yr. Whereas rising charges have helped bolster financial institution web curiosity margins, a mix of upper funding prices, fears of weakening mortgage demand, and powerful competitors is predicted to chop into rising yields, the report advised.
“Given the Fed’s clear sign that it expects to proceed elevating charges till inflation is contained, it’s becoming that ag lenders cited rate of interest volatility as their primary concern,” stated ABA Chief Economist Sayee Srinivasan. “Lenders count on that each short-term and long-term charges will proceed to rise within the coming yr, reflecting market expectations that charges may rise by one other 100-150 foundation factors by the top of the primary quarter of 2023.”
Farm financial system
In response to the survey, lenders cited inflationary stress as their primary concern for producers. Liquidity and farm revenue, two of the highest two considerations in prior years, have been the second and third biggest considerations this yr, respectively. Lenders stay comparatively extra involved about climate and fewer involved about whole leverage than in prior survey years, in accordance with the report. Recession threat, a brand new class this yr, was lenders’ fifth highest ranked concern for producers. By comparability, lenders ranked “a slowing financial restoration” close to the underside of their listing of considerations for producers in 2021.
“A lot of America’s farmers and ranchers skilled a powerful restoration in 2021 and 2022, pushed by increased commodity costs and strong gross sales,” stated Jackson Takach, chief economist at Farmer Mac. “Trying forward, ag lenders are protecting a detailed eye on bills, as feed, fertilizer, gas, and different enter prices stay elevated.”
Respondents’ stage of concern for all classes of commodities fell this yr. Lenders reported the very best ranges of concern for the dairy, fruits and nuts, and beef cattle sectors, however concern for every sector confirmed enchancment over 2021 ranges. Lenders’ considerations notably declined for grains over the yr.
For the second consecutive yr, most ag lenders (66.3%) reported that total farm profitability elevated within the final yr. About one in ten lenders (10.3%) reported that total profitability declined. Lenders count on situations to deteriorate subsequent yr, with 52.6% projecting a decline in farm profitability within the subsequent 12 months. Nevertheless, this stays nicely beneath the 2016-2020 survey common of 82.3%.
Roughly 4 out of 5 ag lenders reported rising land values in 2022, according to outcomes from the 2021 survey. Nevertheless, a rising share of lenders anticipated land values to decelerate (59.4%) or decline (12.7%). Money rents have been additionally reported increased in 2022, with 72.2% of lenders reporting increased rents of their market areas and 43.2% of respondents anticipating money rents to proceed to rise within the subsequent 12 months, doubtlessly including to inflationary pressures for producers.
“Farmland, a big retailer of wealth for thousands and thousands of farm households, continued to understand in 2022,” stated Takach. “Most ag lenders anticipate the expansion of land values slowing within the coming yr, seemingly in response to increased rates of interest and doubtlessly increased farm bills.”
Lending situations
Lenders’ high considerations after rate of interest volatility are lender competitors and weak ag mortgage demand, in accordance with the report. Roughly one in three respondents ranked competitors amongst their high two considerations, down 17% from final yr. Greater than three-quarters of respondents (77.5%) ranked the Farm Credit score System as their primary competitor for agricultural loans. Concern about credit score high quality and ag mortgage deterioration, which was the primary concern in 2020, remained the fourth highest concern going through lenders in 2022.
In line with the report, demand for loans secured by farmland elevated in 2022 at about the identical tempo as in 2021. Demand for agricultural manufacturing loans additionally grew in 2022, reversing the downward development reported final yr. Nevertheless, demand for ag manufacturing loans stays beneath the 2016-2018 survey common. Respondents anticipate that mortgage demand for each classes will proceed to extend over the following 12 months.
Lenders reported broad curiosity from debtors in various ag financing, significantly for livestock grazing practices. The financing of reduced-till farming, precision expertise and canopy cropping practices have been additionally areas of curiosity for ag debtors.
Lenders additionally reported a mean agricultural mortgage utility approval price for brand new loans of 86.0% within the 12 months main as much as August 2022 and, on common, they count on the approval price for renewal requests to be 92.2% within the following 12 months, seemingly resulting from robust situations within the agricultural financial system and a decline in lending exercise resulting from increased charges.
Survey respondents throughout all areas continued to report decrease ag mortgage delinquencies and charge-off charges in 2022. Lenders within the South and West states anticipate credit score high quality will deteriorate subsequent yr, whereas lenders within the Corn Belt and Plains areas count on high quality to stay pretty steady over the following 12 months.
“Credit score high quality was wonderful in 2021 and 2022, so it’s to be anticipated that lenders would anticipate some deterioration within the coming yr because the potential for a downturn grows,” stated Srinivasan. “Ag lenders have deep familiarity with each the ag sector and its cycles and can proceed to work with their debtors and help farmers and ranchers as credit score high quality normalizes to historic ranges.”
The annual ABA and Farmer Mac Agricultural Lender Survey report is a joint effort to offer a have a look at the agricultural financial system and market forces from the distinctive perspective of ag lenders. Greater than 300 agricultural lenders accomplished the survey in August 2022. The responses got here from a various set of establishments, starting from these with beneath $50 million in belongings to these with greater than $1 billion in belongings. Regionally, the responses have been considerably concentrated within the Cornbelt and Plains.
