Credit quality, climate action may affect ag in 2021

Ed Elfman

Twenty-twenty was a year unlike any other. Businesses and agriculture were affected in unprecedented ways by the coronavirus pandemic. As COVID-19 made its way across the United States, the government worked quickly to develop first-time programs to bolster the economy and provide much-needed support to businesses and consumers. The programs included the Paycheck Protection Program, the Economic Injury Disaster Loan Program, and the Coronavirus Food Assistance Program. 

Working through our nation’s lenders, the Small Business Administration’s programs had extraordinary reach — as of August 8, there were 5.2 million PPP loans made by almost 5,500 lenders for a total of $525 billion. And as of October 19, there were 3.6 million EIDL loans approved for a total of $192 billion. 

Through the United States Department of Agriculture, farmers were able to use CFAP to provide income assistance due to pandemic-related losses in the marketplace. As of November 15, there were more than 1.2 million approved applications for over $21 billion. 

There are a lot of unknowns as we look ahead to 2021 and it is difficult to predict what the world may have in store for agricultural banking. It might help if we look at many of the issues that are always at the forefront for agricultural bankers.

Let’s start by looking at the 2020 ABA-Farmer Mac Agricultural Lenders Survey. The top five concerns for bankers going into 2021 are:

  • Credit quality and ag loan deterioration;
  • Lender competition;
  • Weak loan demand;
  • Interest rate volatility, and
  • Shrinking market due to farm consolidation.

These concerns were consistent with the 2019 survey. It is important to really consider what this means: Agricultural bankers consistently have the same concerns about agriculture, and their highest concerns revolve around credit quality. 

Credit quality will continue to be tested and bankers expect more delinquencies in 2021. It should be noted that agricultural loan delinquencies have decreased in the past five years. Additionally, farm banks have outperformed non-farm banks since 2008. 

What will hurt credit quality going forward? As is usually the case, commodity prices and land prices. As we’ve seen with commodity prices, they are very unpredictable, and farm income is dependent on commodity prices. It is important for producers to have marketing plans in place to take advantage of the highs, while protecting against the lows. On the farmland front, 40 percent of bankers believe agricultural land is overvalued and they expect greater declines in land prices. The combination of low commodity prices and a decreased value of farmland could greatly affect credit quality.

Political impact

Agricultural bankers will need to be ready for legislation and policy changes around climate and sustainability. It will be hard to predict what these changes may ultimately look like, but these changes will likely be carried out by individual agencies throughout the administration, including the USDA. While the incoming Secretary of Agriculture will play a central role, I believe it is more important to watch who fills other key positions at USDA over the next year. The undersecretaries and administrators often drive policy changes at USDA and other agencies and may ultimately decide the administration’s climate and sustainability agenda. During the Trump administration there were changes to the National Environmental Policy Act, which greatly helped lenders. Additionally, there were changes around loan making for beginning farmers and ranchers. These are just examples of policy changes, but it gives you an idea of what to watch for over the next year.

But what about Congress? Won’t House lawmakers pursue their own policy changes? The short answer is yes. House Democrats can push policy and pass bills within their chamber, but the House of Representatives needs to have the Senate agree with its policy proposals. If Republicans maintain control of the Senate, it will be much more difficult for Democrats in the House of Representatives to pass legislation that will ever become law. This is what we saw happen in Washington, D.C., for the past two years. This can all change if Democrats win both Senate runoffs in Georgia. Their victories would split the Senate. This change would result in more pieces of legislation finding their way to the President’s desk and potentially becoming law.

Over the past three years, we have witnessed a large increase in payments to farmers. Due to the nature of ad hoc payments, we do not know whether farmers will receive these payments again this year. These payments will be dependent on the agricultural economy and economic recovery from COVID-19. Because the Market Facilitation Program and CFAP payments were ad hoc, it was difficult for lenders to project them as part of cash flow. It is better to assume they will not happen, and adjust accordingly. It cannot be denied that MFP and CFAP helped many farmers over the past few years, but lenders should not expect them to happen “just because,” and they should be ready for potential changes to the programs with the Biden administration.

Where do we go from here?

Barring any unforeseen events, agricultural banking will start the year in the same place it has for the past few years — with a lot of uncertainty. This is the new normal for agricultural bankers. The driving determiner will continue to be commodity prices and land values. The changes in the political world will provide an opportunity to work with a new group of policymakers, but there will likely be some changes to agriculture and agricultural banking. Rest assured, however, that agricultural banks are well-capitalized and ready to help their customers going into the future.


Ed Elfmann is senior vice president, agricultural and rural banking at the American Bankers Association.