How many of you have seen slogans that state, “If you ate today, thank a farmer”?
Or “Farming looks mighty easy when your plow is a pencil and you’re a thousand miles from the corn field.” — Dwight D. Eisenhower.
Here is another one I have seen before that hits home pretty well still today: “The farmer is the only man in our economy who buys everything at retail, sells everything at wholesale, and pays the freight both ways.” – John F. Kennedy.
So how is the farmer of today doing? Are there concerns that farmers should be looking at from beyond the tractor?
In a recent 2020 agricultural lender survey, the results signal there may be some concerns we should be paying attention for the agriculture industry. The group of lenders surveyed belong to the American Bankers Association, a membership association comprised of small, regional, and large banks that account for nearly $11 trillion in loans and $17 trillion in deposits. Member banks working with Farmer Mac provide the agricultural industry with low-cost financing and risk management tools. Farmer Mac has been delivering capital to rural America for over 30 years.
The American Bankers Association and Farmer Mac have collaborated on a national survey of ag lenders since 2016 to gauge lender sentiment of the farm economy, expectations of land values and an outlook for the agricultural economy for the coming year.
According to a recent article in the Ohio State University – Ohio Ag Manger newsletter by Mike Estadt, Ag/NR Educator, Pickaway County & Chris Zoller, Ag/NR Educator, Tuscarawas County, nearly 500 loan officers respond to a survey via email between August and September each year. Responses represent lending institutions that range in assets of less than $50 million to large institutions with assets in excess of $5 billion. There is also a wide geographic distribution of respondents.
The Farm Credit System is not a member of this association and were not participants in the survey. It should be noted that the survey and this report were done prior to this fall’s run up in commodity prices. These findings are a reflection of the prior year and early part of 2020.
Estadt and Zoller identified the following Key Takeaways from the report:
• Profitability expectations – The agricultural economy and farm income remain stressed in 2020. The majority of agricultural lenders surveyed noted compression in farm profitability (79.2%).
• Top concerns for producers – Lenders continue to be most concerned about the liquidity, income and leverage of producers. Uncertainty regarding tariffs and trade, the weather and the impacts of the COVID-19 pandemic and resulting economic downturn are close behind.
• Top concerns for lenders – Lenders across all regions and sizes remained concerned with credit quality and competition for loans in 2020. Concern regarding weak loan demand was the third highest ranked concern reflected across most regions except in the West.
• Sector concerns – Respondents expressed the most concern for the grain, dairy and cattle sectors. Concerns declined for vegetables, poultry, and fruits and nuts. Lenders reported sustained interest from borrowers in hemp and alternative energy financing.
• COVID-19 Economic Downturn – While concern about the pandemic was lower than that for borrower financials, 87.4% of respondents noted that ag borrowers’ reliance on government payments in 2020 increased. More than half inquired about government programs like the CFAP/MFP (68%) and PPP (58%). Lenders said that loss of these payments would negatively impact ag borrower profitability.
• Land value and cash rent expectations – Seven-in-ten lenders say that land values held steady through 2020, but more than a third expect land values to decline in 2021, including 41% in the Cornbelt and 39% in Plains states. One fifth of lenders reported cash rental rate declines on average quality farmland in 2020 (22%), a smaller decline than was observed in 2019. Lenders still believe that average quality farmland and cash rents are overvalued (40% and 30% respectively), with higher shares in the Cornbelt and Plains states.
• Loan Demand – While over half of lenders reported that demand for ag production and ag real estate loans were flat over the last 6 months, a significant share reported increased demand (26.7% and 33.3% respectively) and 82.2% said that overall farm debt increased over the past year. Similar expectations were reported for loan demand next year.
• Credit quality – Survey respondents generally expect higher ag loan delinquency rates heading into 2021 for both production (59.9%) and ag real estate (46.7%), though, a majority expect loan charge-off rates to stay about the same (61.5% and 70.4%, respectively). About one out of five ag borrowers (18.1%) requested a loan modification in 2020 as a result of the pandemic and resulting economic downturn.
• Approval rate – In spite of the credit quality concerns, lenders remain positive about approvals. Lenders reported an average agricultural loan application approval rate for new loans of 72.3% in the 12 months leading up to August 2020 and expect the approval rate for renewal requests to be close to 90% in the following 12 months.
Tony Nye is the state coordinator for the Ohio State University Extension Small Farm Program and has been an OSU Extension Educator for agriculture and natural resources for over 30 years, currently serving Clinton County and the Miami Valley EERA.