According to the 2023 ABA and Farmer Mac Agricultural Lender Survey, ag lenders estimate that more than three-quarters of their borrowers will remain profitable in 2023 and two-thirds will remain profitable through 2024. However, as concerns about inflation ease, ag bankers are growing nervous about farm liquidity and income heading into next year.
Following a record year for farm profitability in 2022, with income surpassing $200 billion, the farm economy has witnessed a sharp turnaround as commodity prices trend lower and exports lag behind last year. As a result, the USDA projects 2023 net cash farm income will decline -26.5% relative to last year. The report authors note that while this is not ideal, farm incomes would still be approximately +50% higher than the long-term average if the forecast is realized — underscoring the historic profitability levels in 2022. Still, the decline in lender sentiment largely reflects the farm income pullback. Below are some of the highlights from the report, which is available HERE.
Liquidity and Profitability Concerns: Liquidity has become the primary concern among agricultural lenders for their borrowers, followed closely by farm income levels. While Lenders expect profitability to dip, it is still expected to remain relatively elevated this year. In 2023, lenders estimate that 77.5% of agricultural borrowers will be profitable. While this is a slight decline from 81.3% in 2022, it is well above the 51.0% and 57.2% reported by lenders in 2020 and in 2019, respectively. Lenders do foresee tighter profitability in 2024, as expectations are for 66.7% of borrowers to remain profitable next year. The largest decline is expected in the Corn Belt and Plains states. This likely reflects the concentration of grain farms in these regions and the pullback in grain prices over the past year.
Sector Concerns: Despite a broad decline in commodity prices, lender comfort with individual commodity exposures remained relatively stable in 2023. The commodities with the highest concern levels in 2023 were dairy and pork. Dairy prices reached record levels in 2022, boosted by strong export demand. However, a pullback in export demand for both dairy products and pork has weighed on prices this year. For pork producers, profit margins declined to the lowest levels since 1998. Even so, lenders’ concerns were highest for dairy, with 51.4% reporting moderate or high concern (up from 28.0% in 2022). Pork was ranked as a moderate concern or higher by 24.0% of lender responses. Meanwhile, concern levels for the beef sector remained elevated despite beef sector prices setting new records in 2023. A total of 13.1% of lenders responded with a moderate concern or higher for the beef sector. A portion of this concern may be related to elevated feed prices and the ongoing drought across the Southern Plains. In general, concern levels tend to reflect the amount of exposure a financial institution has to a given commodity.
Rising Farm Debt: In the 2023 survey, 51.7% of lenders responded that farm debt increased over the past year. This was significantly lower than the expectations expressed in last year’s survey, and likely due to high farm incomes and rising interest rates. Meanwhile, 18.7% of lenders responded that farm debt has declined at their institution. Looking ahead, though, the projected decline in farm incomes may lead to greater loan demand. Nearly 4 out of 5 lenders (77.8%) expect farm debt will increase over the next 12 months, and an even greater proportion of lenders expect production loans to increase this coming year relative to real estate loans. Lenders also expect strong loan performance to continue. Over 95.0% of lenders reported that delinquencies and charge-off rates on real estate and production loans declined over the past year. Only 10.1% and 9.0% expect charge-offs on ag production and farmland loans, respectively, to increase over the next 12 months.
Land Values and Cash Rents Expectations: Farmland values have shown a sizable increase in value since 2020. Lenders reported an average gain of 8.3% in 2021, an average gain of 18.9% in 2022 and an 11.2% perceived increase in 2023. The authors note that the reported average gain of +11.2% for 2023 is higher than the USDA-reported +7.4% average, as the Ag Lender Survey had a higher concentration of Corn Belt and Plains lenders. Lenders reported average farmland growth of 11.9% and 12.6% for the Corn Belt and Plains. In total, 82.4% of lenders observed an increase in average-quality farmland values in their markets in the past 12 months. Lender expectations for 2024 land values are considerably more conservative. Less than half of lenders expect an increase in land values next year, and the average expected change was 2.1%. Lenders in the South and West are more optimistic about future land values compared to those in the Corn Belt and Plains regions. Like with land values, lenders are reporting higher levels of cash rents this year, though lenders expect these will hold or decline in the next 12 months. Most respondents (52.6%) reported an increase in the cash rental rate of average-quality cropland in their market territories, but more than two-thirds of respondents (69.9%) expect rental rates to hold steady in 2024.