For the first time since at least 2016, a majority of agricultural banks expect their farming clients to record higher profits this year, even as new risks start to emerge in the volatile sector.
Nearly 70% of ag lenders projected that farm profitability will increase in 2021 from the previous year, according to an August survey of more than 450 banks by the American Bankers Association and Farmer Mac. Last year, less than 4% of the lenders surveyed expected farm profits to rise from 2019.
The 2021 results align with a forecast by the U.S. Department of Agriculture that farm profits will grow by more than 15% this year.
“Ag banks and producers are turning the corner,” said Heather Malcolm, vice president of the $201 million-asset Bank of the Rockies in White Sulphur Springs, Montana.
U.S. farmers have been benefiting from higher worldwide demand for cops, easing trade tensions and government payouts to farmers. However, those subsidies are expected to decline next year — one of several factors that could derail the turnaround.
Ag lenders estimate that government payments accounted for 38% of farm income in 2021, according to the survey by the ABA and Farmer Mac, the government-sponsored enterprise formally known as the Federal Agricultural Mortgage Corp. The government funds came from the USDA, the Paycheck Protection Program and other initiatives.
The USDA disbursed $1.8 billion in crop insurance payments to farmers who enrolled last year and has reopened the program for next year. Though debt relief for farmers of color who took out government-backed loans
“Ag lenders believe that the strong incomes of 2021 will help put their borrowers on a sounder financial footing than they have been in a half decade,” Greg Lyons, an economist with Farmer Mac, said in a recent press release announcing the survey results.
Farm country has also benefited from a rise in crop prices as economies have reopened following shutdowns in the early months of the pandemic, and demand has outstripped supply.
The USDA estimated the price for corn in the 2021 marketing year would be $5.45 per bushel. That would be the third highest price in history, according to researchers at the University of Illinois.
The estimate for soybeans was $13.85 per bushel, which would be $2.00 more than last year and also the third highest in history.
Despite the strong performance this year, experts see turbulence ahead. In 2022, farmers will rely less on government payments, Malcolm said.
And in the short term, bankers believe that loan demand has been sapped — in part by higher government payments. For the first time since 2016, when the survey began, lenders reported a pullback in demand. About 39% of lenders polled said declining loan demand was a high risk.
While loan demand was a sizable worry for banks, price increases were a major concern for farmers. Roughly 40% of agricultural banks listed inflation as a top concern among their clients, according to the survey.
Farmers are currently benefiting from rising land values, but the higher prices are also a potential source of concern, since they could result in some farmers becoming overleveraged. Ag lenders reported an 8.3% increase in land values this year, according to the survey, while the USDA recently estimated a 7% uptick.
Increasing land values are cause for alarm, argued John Blanchfield, who runs the industry consultancy firm Agriculture Banking Advisory Services.
“I think there is a bubble in farmland developing,” he said. “So far the bubble seems to be fueled by farmer cash, not farmer debt.”
Farmer Mac Chief Economist Jackson Takach offered a more upbeat view, saying in the press release that higher property values are “evidence of the improved economic conditions experienced by farmers and ranchers in 2021.”
Roughly eight in 10 ag banks expect land value gains of more than 3% next year, according to the survey. The banks surveyed range in size, from as little as $50 million in assets to more than $1 billion in assets.
“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,” Takach said.
