The agricultural sector is a vital part of the United States economy. It provides food and fiber for consumers, supports rural communities, and generates billions of dollars in economic activity. Despite its importance, the agricultural sector has faced financial challenges in recent years. Market volatility, low commodity prices, increased input costs, and weather-related disasters have put pressure on farmers and ranchers when it comes to thinking of borrowing and lending money.
So, do borrowers and lenders have better financial health in 2022? In this blog post, we’ll take a look at the state of the agricultural economy and the outlook for borrowers and lenders in the coming years.
The Agricultural Economy in 2022
Unprecedented supply chain disruptions, market volatility, and rising geopolitical tensions have all occurred this year. As a result, prices for commodities, inputs, and energy are approaching all-time highs. The Federal Reserve has raised the Federal Funds Rate at the quickest rate in over 30 years, and further hikes are anticipated this year in an effort to battle inflation. As farmers attempt to manage this historic situation, these occurrences are shocking in all facets of agriculture.
Given that rising input, energy, and finance prices are starting to cut into relatively robust margins, this volatility has raised concerns about the viability of the agricultural industry and the financial stability of ag debtors. Today’s problems—slowing economic growth, rising inflation, higher interest rates, etc.—recall the farm crisis of the 1980s in many ways.
While the farm financial crisis understandably still looms big in some people’s minds, the state of farm finances now is significantly better than it was before the crisis, partly because of lower leverage. Since the early 2000s, the whole sector debt-to-asset ratio has been averaging between 10% and 15%, down from 15 to 23% during the farm financial crisis. Over 80% of Iowa’s farmland is debt-free, and it’s probable that this trend is shared by other grain belt states. The number of farms having debt has reduced during this time, in part because of ongoing farmland consolidation, even while the aggregate quantity of farmland debt has increased. This drop is partly a result of modifications to lending policies and regulations.
The Agricultural Lending Standpoint
Looking from the standpoint of agricultural lending, the Farm Credit System and commercial banks, which together account for about 70% of all agricultural real estate lending (and more than 60% of operating lines), dominate the market.
Both cooperatives and deposit-taking institutions are in a far better situation than they were in previous years, notwithstanding their structural differences. This partially reflects ongoing consolidation. Since the late 1970s, there have been just over 1,200 active agriculture banks, a reduction of almost 70%. The Farm Credit System is still consolidating, with the total number of banks and organizations down 37% since 2000 and this year seeing the announcement of yet another round of sizable mergers. As a result of the increased diversity of financial institutions, scale and risk are reduced across larger, more diverse portfolios.
Growing capital and liquidity levels are another indicator of the financial health of the lending industry.
In the 1980s, equity capital ratios for agriculture banks were often around 8%. The average amount right now is closer to 12%. The equity capital ratios for the Agricultural Credit System as a whole are currently averaging 15%, which is more than twice what they were during the farm financial crisis. More crucially, these organizations have a lot more liquidity on hand to lessen catastrophic and protracted financial market crises. At the end of 2021, the Farm Credit System institutions had a liquidity position of $81 billion (cash and eligible investments), or 23% of total debt, which would have covered maturing debt and borrowings in 175 days. This contrasts with the 1986–1987 period’s meager 20 days of liquidity.
Therefore, even though the majority of the agricultural sectors’ operational environments are likely to remain unstable in the short term, there is good reason to think that agricultural producers and finance institutions are in good shape. A landscape that is far more suited to withstand volatility—and, more significantly, prepared to handle a potentially prolonged downturn in the years to come—has emerged as a result of ongoing consolidation, increased liquidity and capital levels, and relatively strong borrowers.
So, Is It Time to Worry About Agricultural Lending?
The short answer is no. Even if an agriculturally-related recession were to occur, it would be much milder than the one experienced before, given the current financial situation of borrowers and lenders. Moreover, should another market crash or other global economic event take place, agricultural lenders are far better equipped to weather the storm than they were in the past.
That being said, it’s important to remember that there are still a number of uncertainties that could impact the agricultural sector in the coming years. So it’s always important to monitor the situation and make sure that you’re prepared for whatever comes next.
Have Farm Plus Financial Help You Secure the Best Agricultural Financing for Your Needs
No matter what the future holds, Farm Plus Financial is here to help you secure the best agricultural financing for your needs. We offer a variety of loan programs to fit every farmer’s unique operating style and risk profile. From start-ups to established operations, we have a loan that’s right for you. Contact us today to learn more about our services and how we can help you grow your operation without worrying about your finances.