U.S. agricultural lenders expect 80 percent of their borrowers will be profitable this year, although that number drops nearly 10 points in 2022, according to the Fall 2021 Agricultural Lender Survey Report.
Expectations have sharply risen for both this year and 2022, according to the report from the American Bankers Association and Farmer Mac, one year after much of the Corn Belt and Plains states had historically low corn, soybean and wheat prices. Lenders reported an average 8.3 percent increase in land values in 2021, and nearly 80 percent expect additional gains of 3 percent or more next year. However, banks that lend primarily to dairy and cattle operators expect one-third of their operators to be unprofitable next year following higher input costs and volatile commodity markets for animal proteins.
The increase “is additional evidence of the improved economic conditions experienced by farmers and ranchers” this year,” said Farmer Mac Chief Economist Jackson Takach. “Land is the single largest asset class on farm balance sheets, so the asset appreciation provides additional equity to many producers across the rural landscape.”
For the first time in the survey’s five-year history, a majority of ag lenders (nearly 70 percent of the survey’s 450 respondents) reported overall farm profitability had increased in the previous year, after an infusion of government support. Lenders reported an average new ag loan approval rate of nearly 77 percent. They expect the approval rate for renewal requests to be near 90 percent over the next 12 months.
“Ag lenders remained critical partners for farmers and ranchers in 2021,” said ABA Chief Economist Sayee Srinivasan. “While government payments partially offset loan demand last year, lenders continued to meet the financing needs of their borrowers and provided additional support through Economic Injury Disaster Loans and loans made through the Paycheck Protection Program. As evidenced in the survey findings, the ag community is exposed to tailwinds and headwinds, and ag lenders are well-positioned to partner with and support it.”
Weak loan demand from borrowers and lending competition topped the list of respondent concerns. Slightly more than half of ag lenders ranked competition as a top-two concern, up 13 percentage points from 2020. More than four-in-five said the Farm Credit System was their top competitor for ag loans. More than three-in-five lenders said community banks were among their top two competitors.
“With the flat yield curve, we have seen a considerable increase in demand for long-term fixed rates at attractive rates, and lenders have reported that they’re feeling the competitive pressure,” Takach noted.
Ag lenders especially expressed concern for the dairy, beef cattle and grain sectors, according to the report, though that lessened for beef cattle and grains.
Inflation was listed as the No. 1 issue for ag producers. “Rising inflation could lead to Federal Reserve federal funds rate increases, suppressing overall demand and creating uncertainty for borrowers with variable rate products,” the report stated. “Inflation is a key risk that could harm borrower incomes, borrower repayment, and overall loan demand.”