Deepening downturn in U.S. agriculture economy red flag for banks

Weak commodity prices, high interest rates and lingering inflationary pressures could sink farm income for a second straight year in 2024. This could hamper agriculture borrowers' ability to service their debts and present loan-loss challenges for banks.

"How do farmers manage through all this? That's the 800-pound gorilla in the room," said Curt Covington, senior director of institution credit at AgAmerica Lending, an agriculture specialty lender in Lakeland, Florida.

At issue: U.S. farm incomes could drop 26% this year to $116.1 billion after falling 16% in 2023 amid a slump in prices for many crops, the U.S. Department of Agriculture said in a February forecast. This would follow a record year for income in 2022, when farmers collectively earned $185.5 billion.

For example, corn and soybean prices that are critical for the fortunes of farmers throughout the Midwest were both down about 10% early this year after double-digit declines in 2023 amid bumper crops, excess supply and pullbacks in export demand from China and other foreign economies that are slowing.

U.S. farmers ramped up crop output in the early days of Russia's invasion of Ukraine in 2022 to meet a sudden spike in global demand. Agriculture-heavy Ukraine's crop exports were curtailed, and American producers helped to fill the void. But supplies grew too abundant and, with parts of the global economy sluggish, demand declined over the past year. Crop prices followed suit.

Additionally, while substantially improved from its peak in 2022, festering inflation continues to keep costs for everything from labor to equipment relatively high, making it too costly for many farmers to profitably plant crops this year.

Against that backdrop, agriculture bankers and economists say more farmers may struggle to cover their costs and loan payments, raising credit risk.

"Some farmers will find themselves in trouble with their lenders," Covington said.

The Purdue University/CME Group Ag Economy Barometer, a measure of farmer sentiment, produced a reading in January that was 18% below the same month a year earlier.

Farmers "pointing to lower commodity prices and lower farm income in 2024 significantly influenced the decline," said James Mintert, director of Purdue's Center for Commercial Agriculture.

"For the first time, the percentage of producers choosing lower commodity prices as a top concern matched the percentage of producers who chose higher input costs. This alignment indicates that U.S. farmers are worried about a possible cost/price squeeze," Mintert added.

More farmers could delay investments this year — and loans to invest in them — as well as spending, hampering the economies of surrounding communities. Rural economies across the central and western U.S. depend upon farmers and agribusiness spending their profits at local businesses. Without that spending, business owners could struggle and eventually fail to make their own loan payments.

Creighton University's February Rural Mainstreet Index, an economic indicator for an agriculture-heavy, 10-state central U.S. region that stretches from Minnesota to Arkansas, showed bank CEOs were increasingly concerned about deteriorating conditions.

The index's reading for February fell to 46.2 from 48.1 in January. The index ranges between 0 and 100, with a reading below 50.0 representing contraction. For a sixth straight month, the index came in below 50.  

"Higher interest rates, weaker agricultural commodity prices and a credit squeeze are having a significant and negative impact" on farmers and rural businesses, said Creighton economist Ernie Goss.

Jeff Bonnett, CEO of the $302 million-asset Havana National Bank in Havana, Illinois, said weak commodity prices are an increasingly prominent worry. 

Corn prices, for instance, "that are $1.50 to $2.00 per bushel less than break-even" for farmers "are obviously not sustainable," said Bonnett, who participated in the Creighton survey.

Jim Eckert, CEO of the $47 million-asset Anchor State Bank in Anchor, Illinois, also responded to the survey with caution. "Our farmers are not projecting very profitable operations in 2024. Although some input costs are down from last year, weak grain prices for the 2024 crop are depressed and expected to remain so," he said.

Others in the industry said that, while 2024 could prove difficult, most companies that actively lend into the agriculture sector emphasize to borrowers the need to save during banner periods of earnings in order to weather recessionary stretches.

Bruce Lee, president and CEO of the $19.4 billion-asset Heartland Financial USA in Denver, a prominent Midwest farm lender, said the agriculture industry is one that banks should commit to for the long haul. Over the course of decades, the sector tends to advance and provide solid returns for banks. But near-term ups and downs are common.

"You don't just jump in and out of it," Lee said. "If you are going to be in the ag business in the Midwest, you have to be committed to the business."

AgAmerica's Covington agreed. He said that, in periods of low prices, crop producers tend to pull back to keep expenses in check and align supply with demand. Once that happens, prices recover and farm profitability soon follows. So while farm-related credit losses could rise this year, he does not expect a looming crisis or even an enduring slump.

"Depressed commodity prices typically do not stick around for long," Covington said.