Ag lenders concerned about credit quality

Credit quality and the deterioration of agricultural loans remain top concerns for ag lenders as the farm economy works through its continuing downturn, according to the most recent agricultural lender survey report by the American Bankers Association and the Federal Agricultural Mortgage Corporation. 

Regarding their customers, ag lenders are most concerned about producers’ liquidity and farm income, though trade and weather uncertainty were also high on the list, relative to the previous survey results in 2018. This year’s report was released during ABA’s ag banking conference, which took place in Dallas this month. 

“Bankers are naturally concerned for their farmers and ranchers as the ag economy continues to regain its footing,” said James Chessen, ABA chief economist. “Bankers know the cycles of agriculture very well and will continue to work side-by-side with their customers as they have done in the past.”

“While uncertainty has risen, banks are well prepared to continue their support for the ag community through these challenging times,” Chessen said.

Farm income and profitability

Lenders reported that more than half of their agricultural borrowers, on average, were profitable in 2019, but the majority of respondents across all regions noted that profits were declining (82.5 percent).

Lenders expected that 56 percent of their borrowers will remain profitable through the end of the year. Dairy, grains and cattle were the sectors that concerned bankers the most, while lenders reported being less concerned about the swine, poultry and vegetable sectors, comparable to previous years’ expectations. 

“The farm profitability picture remains tight in 2019, and ag lenders see that come through in their customers’ financials,” said Jackson Takach, Farmer Mac’s chief economist.

American farmers and ranchers, however, are adapting to the new economic reality, looking for new sources of income and increased efficiencies through technology,  Takach said. About one in every three lenders identified an increase in ag technology investment in the past year, and a comparable share expected the investment in ag tech to grow in the coming year.

Producers are also asking about new sources of income or cost mitigation, according to the report. Roughly half of the respondents said their borrowers asked about financing hemp production, and 36.8 percent of respondents noted an increase in requests for alternative energy project financing. 

Lender sentiments and conditions

More than half of lenders said demand for ag production loans was flat in the past year, though 45.3 percent of lenders with assets between $50 million and $250 million reported increased ag production loan demand. Demand for farmland loans was flat in the past 12 months, according to the survey, though 46.5 percent of lenders expected demand to increase in the next year.

Overall, respondents expected loan delinquency rates to rise in the next year, among both production and real estate loans. The majority of lenders, however, don’t expect higher loan charge-off rates in the coming year.

“While higher delinquency rates make banks more cautious about the future, bankers remain optimistic that approvals for credit will rise,” Chessen said. 

Lenders remained optimistic about approvals despite their concerns about credit quality. On average, three in every four ag loan applications were approved in the 12 months leading up to August. Respondents also expected the approval rate for renewal requests in the coming year to be close to 90 percent. 

“While ag lenders remain concerned about farm liquidity and leverage, they do not expect major declines in land values and are optimistic for a high approval rate this coming loan renewal season,” Takach said.