Farmer Mac (the Federal Agricultural Mortgage Corporation, which serves as a secondary market in ag loans such as mortgages for agricultural real estate and rural housing) puts together an ag lender survey each year to see where those entities stand vis-à-vis their ability to help farmers. A team recently reviewed the 2023 survey results.
The Farmer Mac Ag Lender Survey was conducted in August 2023, and the top concerns for lending institutions at that time were interest rate volatility, lender competition and credit quality/ag loan deterioration.
“It’s understandable why these are the top concerns,” said Tyler Mondres, senior director of research at the American Bankers Association (ABA).
Mondres continued by noting that it looks like inflation and unemployment are slowing. He reported that the Fed has room to keep rates where they are, and possibly even lower them in 2024.
“A lot can change over a couple of months,” he said. “If you succeed in slowing down the economy, you also see a slowdown in loan requests.”
“The top concerns for farmers are liquidity (working capital), farm income levels, inflationary pressures (rising input costs, etc.) – the usual top three concerns,” said Blaine Nelson, senior agricultural economist with Farmer Mac. “Part of the liquidity issue is that people are using their working capital, partly because of the spike in interest rates.”
Nelson added that USDA expects a 20% overall drop in farm incomes in 2023 – not a great sign for those looking to take out reasonable loans.
“Liquidity and inflation go hand in hand,” stated Caleb Hopkins, vice chair of the ABA Ag and Rural Bankers Committee.
What were the big takeaways from their survey?
- Profits and credit held steady in 2023 but concern is brewing for 2024.
“It wasn’t any surprise that profitability expectations are trending lower this year, but they’re still not as low as 2019-20 levels,” Nelson said. “I would classify 2023 as kind of a transition year; we’re forecasting 2024 to look more like pre-2019 levels, with decreased farm profitability.”
The group noted their survey results lined up with USDA data. However, there is a lot of variation across regions in regards to profitability. New England, for example, dealt with much more wet weather in 2023 than other regions.
Also expected to return to pre-pandemic levels over the next 12 months is farmer credit quality. For 2024, everyone is expecting a moderate deterioration in credit quality across all farming regions. “It’s just an expectation for things to normalize,” Mondres said. “Ag credit quality remains strong – ag lenders in particular will continue to have a stronger portfolio than non-farm banks.”
Part of that strong ag credit is courtesy of government payments during and since COVID which have helped drive delinquencies down and keep credit quality high.
“But you have to take care of yourself and your operation – you can’t keep relying on government assistance,” Hopkins warned. “Those days of being ‘saved’ are probably behind us.”
- An expectation of variability in rates.
Even though the Fed may hold or drop interest rates, Nelson said the survey indicated lenders expect higher rates to hold or even advance.
“In August, the expectations for future interest rates was lower over next 12 months (but still above no change), for both short- and long-term rates,” he said. “If we re-surveyed today, I think short-term expectations would be for decreased rates.”
- Land values will increase, loan demand will slow and lenders will have tighter lending standards.
Nelson noted that land values will continue to increase in 2024, but the market is starting to lose steam. Survey results expect to see a bit of a plateau on that front. Lenders expect loan demand to grow for both ag production and farmland because of that.
As for how easy it will be to find a loan… “In the last six months in particular, we’ve seen some institutions easing standards, some making them more difficult to attain,” Hopkins said.
Many survey respondents said they are tightening underwriting standards, tightening loan terms, using digitization/technology investments and implementing changes to product mixes. However, nearly one-third of lenders said they haven’t changed their standards in the past year.
Remember that if you are searching for a loan this year to heed Mondres’s takeaway from the survey – that ag lenders will continue to have stronger portfolios than non-farm banks.
by Courtney Llewellyn