A survey recently conducted by the American Bankers Association and the Federal Agricultural Mortgage Corp. (Farmer Mac) found that nearly 90 percent of agricultural lenders have seen a decline in farm profitability in the last 12 months.
The survey of more than 350 agricultural lenders reported, however, that the majority of their current agricultural borrowers (60 percent) were profitable in 2016 and expects 54 percent to remain profitable in 2017.
Among main issues reported, 95 percent of lenders indicated that commodity prices — particularly grains, beef cattle and dairy — are a top concern. While concerns about commodity prices varied by region, overall, lenders are most concerned about grains — 80 percent rated it a four or five on a scale of one to five — followed by beef cattle (63 percent), dairy (55 percent), swine (40 percent), poultry (21 percent), vegetables (20 percent), and fruits and nuts (17 percent).
The decline in commodity prices has led to a fall in farm income, and subsequent tightening in profitability.
Lenders also expressed concerns about land values. Nearly half of the respondents (47 percent) said they had lower land values in 2016, and 56 percent expect further declines in 2017
Due to lower levels of cash, agricultural lenders also expect greater demand for debt financing. Of the respondents, 66 percent expect an increase in agricultural operating loan demand in the first half of 2017, while 33 percent of lenders expect demand for agricultural real estate loans to increase.
“These responses are consistent with agricultural credit downcycles — financing needs on the farm increase at the same time as profitability and short-term creditworthiness decreases. Fortunately, ag lenders are seasoned, most with long careers in agriculture, and they understand these cycles well,” Jackson Takach, Farmer Mac’s in-house economist, said.