Agricultural lenders view soaring interest rates and high inflation as their top two issues heading into 2023, according to the 2022 Agricultural Lender Survey produced by the American Bankers Association and Farmer Mac.
According to the survey taken of more than 300 ag lenders in August, nearly half cited interest rate volatility as among their top two concerns, up 35 percentage points from 2021. Though bank net interest margins have been bolstered by rising rates, bankers are expressing fear that reduced loan demand and strong competition could cut into rising yields.
Year-over-year inflation was measured at 8.2 percent in September. The Federal Reserve Open Market Committee increased interest rates by 0.75 basis points for the fourth straight time early this month, increasing the federal funds rate to between 3.7 percent and 4 percent.
“Credit quality was excellent in 2021 and 2022, so it is to be expected that lenders would anticipate some deterioration in the coming year as the potential for a downturn grows,” said ABA Chief Economist and Head of Research Sayee Srinivasan. “Ag lenders have deep familiarity with both the ag sector and its cycles and will continue to work with their borrowers and support farmers and ranchers as credit quality normalizes to historical levels.”
Lenders said inflationary pressures were their No. 1 concern for producers, followed by liquidity and farm income. According to the report, lenders are more concerned about weather and less concerned about total leverage than in previous years. Two-thirds of ag lenders said that overall farm profitability increased in the last year. Only 10 percent of lenders said overall profitability had declined; just over half, however, expect farm profits to fall in the next 12 months.
Approximately four out of five reported that land values had increased this year, consistent with last year. Demand for loans secured by farmland increased this year at approximately the same pace as in 2021, according to the report. Lenders reported increases in demand for alternative ag financing, especially for livestock grazing practices, as well as financing for precision technology, cover-cropping practices and reduced-till farming.
“Many of America’s farmers and ranchers experienced a strong recovery in 2021 and 2022, driven by higher commodity prices and robust sales,” said Jackson Takach, chief economist at Farmer Mac. “Looking ahead, ag lenders are keeping a close eye on expenses, as feed, fertilizer, fuel, and other input costs remain elevated.”