Lenders expect farm profitability to decline

Article appeared in the 11/8 edition of AgriPulse. Article was written by Noah Wicks.

Agricultural lenders are bracing for declines in farm profitability next year amid the looming threat of a recession, but some believe strong commodity prices could help ease some of the potential pain producers experience.

More than 52% of 300 agricultural lenders that participated in a survey conducted by the American Bankers Association and Farmer Mac expect a decline in farm profitability over the next 12 months. Most of these bankers also cited interest rate volatility as their biggest concern in the current year, while saying inflationary pressure is the largest concern for producers.

The Federal Reserve has been hiking interest rates to calm the inflationary pressure built into the U.S. economy over the last year. Nate Franzén, president of the Agri-Business Division at First Dakota National Bank in Yankton, S.D., said the heightened rates are adding to producer costs.

But Franzén says commodity prices have remained strong and believes there’s a good chance they will remain high due to lower supplies. He noted economists anticipate a recession as early as next year, which he believes will bring interest rates down somewhat.

If a recession were to come, however, Franzén doesn’t believe interest rates will drop to the near-zero lows producers saw in 2020 and 2021. He believes they will be reduced to more “normal” levels, instead.

“That’ll be just fine,” Franzén told Agri-Pulse at the Ag Bankers Conference in Omaha, Nebraska, on Tuesday. “The market will adjust and, quite frankly, that’s probably healthier. There’ll be value to cash again.”

Last week, the Fed raised the target range for the federal funds rate to 3.75 to 4 percent. The increase is a dramatic shift from the near-zero figures in March.

Caleb Hopkins, the vice president for Westside State Bank in Halbur, Iowa, says the heightened interest rates will become a larger consideration for producers making financial decisions.

“When you run cash flows and as you have those discussions, you just need to make sure you're discussing that with clients and they understand it because it's out of our control,” Hopkins said.

Many economists anticipate the Fed's interest hikes will result in a recession, which could come as soon as next year. And if one were to come, some bankers believe demand for farm loans could weaken.

“Farmers are still going to need operating lines of credit going into the year, but I think they're gonna be more mindful of capital expenditures, equipment purchases, land purchases,” said Rachel Holland, the senior vice president and ag loan officer at the United Bank of Southwest Alabama and Northwest Florida. “So that's where, from a banker's standpoint, we've gotta be pretty competitive. We're going to have to come up with different products that can help with loan demand, hopefully, going forward.”

Lender competition was the second-greatest overall concern lenders expressed for this year in the survey. One in three respondents ranked competition in their top two concerns, according to the Ag Lending Survey report.

Approximately 77% of these respondents ranked the Farm Credit System as their top competitor for agricultural loans. Community banks were among the top two competitors for 67.8% of respondents, while vendor financing (20.3%) and regional banks (7.5%) were other factors in responses.

Weak loan demand was ranked by respondents as the third-greatest concern, with more than 35% of bankers ranking it among the top two. Concerns about credit quality and ag loan deterioration ranked fourth, being expressed by 20.7% of respondents.

Here is the article in it's entirety in AgriPulse.