Weak prices, hefty crop supply threaten farm income and loan losses

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Agricultural lenders expect only 58% of their borrowers will remain profitable this year compared to 78% in 2023, creating the specter of increased loan losses.

The 2024 Ag Lender Survey report, produced jointly by the American Bankers Association and the Federal Agricultural Mortgage Corp., also known as Farmer Mac, said the results reflected a jump in global crop supplies that has suppressed commodity prices and threatened both U.S. farm incomes and land values. A majority of lenders expect land values and cash rents to either plateau or decline.

The report found profitability expectations varied by region and major commodity types, with livestock producers more optimistic than crop growers.

"The agricultural economy is inherently cyclical, and ag lenders are navigating the changing conditions across the sectors they serve," Jackson Takach, chief economist of Farmer Mac, said Thursday in presenting the findings at the ABA Agricultural Bankers Conference in Milwaukee.

A decline in farm income this year would continue a downward trend. In 2024, the U.S. Department of Agriculture estimated net farm income at $140 billion, a 4% decrease from 2023. This was 15% above the 20-year average but 28% below the 2022 record high. Farmers collectively earned $185.5 billion in 2022 amid a global surge in demand during the onset of Russia's invasion of Ukraine and resulting supply disruptions in Europe.

The No. 1 concern facing agriculture banks was loan losses. Lender competition and interest rate volatility were the second and third greatest overall concerns, respectively, according to the ABA and Farmer Mac report.

"Agricultural credit quality remained robust in 2024, but lenders expect deterioration in the coming year as farmers face a more challenging environment," said Tyler Mondres, senior director of research at the ABA. "Lenders are taking prudent steps to manage risk such as tightening underwriting standards."

There are more than 1,400 lenders that specialize in agricultural lending — most of them community banks.

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In 2023, 98% of farm banks were profitable, with 53.5% reporting an increase in earnings, according to the ABA. Coming off of historically low delinquency rates, the median noncurrent rate at farm banks — based on loans 90 days or more past due and loans in nonaccrual status — edged up by just 3 basis points from the prior year to 0.23%. The noncurrent loan ratio for the broader banking sector was 0.27%.

Farm bankers said in a separate survey that their customers' confidence was on a steady downward slope.

For a 14th straight month, Creighton University's Rural Mainstreet Index fell well below growth neutral. The October poll of bank CEOs in rural areas of a 10-state region dependent on agriculture produced a reading of 35.2, down from 37.5 in September. It was the lowest reading since the beginning of the pandemic in spring 2020. The index ranges between 0 and 100, with a reading of 50 representing growth neutral.

"Weak agriculture commodity prices, sinking agriculture equipment sales, elevated input costs and falling farmland prices" were all catalysts for the slump, said Ernie Goss, the Creighton economist who oversees the survey.

Goss' poll found 61.5% of bankers indicated that the financial position of farmers in their service areas had deteriorated over the past six months. The remaining 38.5% reported that farmers' financial position was unchanged.

Corn futures recently hovered around $4.30 per bushel, far from the $6 or higher level in 2022. Soybean prices are down similarly, according to data provider DTN.

"Even with above average yields on corn and soybeans, most local farm producers will still cash flow at less than break-even prices," said Jeff Bonnett, president and CEO of the $300 million-asset Havana National Bank in Illinois.