Ninth District Community Banks know that the financial health of the agricultural sector drives changes in agricultural lending.1 The volatility of farm incomes and expenses necessitates continuous assessment of credit needs, and district community banks play an important role in this process. About half of the 457 community banks in the district are considered agricultural banks.2 Farm banks hold more than two-thirds of farm debt outstanding in the Ninth District, totaling more than $14 billion at the end of 2021, showing just how critical farm lending is of a rural economy.
Agriculture sector income in 2020 and 2021 — better than expected
After five years of below-average farm incomes, the agriculture industry, producers and bankers have approached 2020 with optimism. The optimism was short-lived, however, as the COVID-19 pandemic sowed uncertainty in global markets. The initial uncertainty triggered a drop in agricultural commodity prices, which fell 11.4% in one month.3
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Lower commodity prices have been greeted by pandemic relief packages for the agricultural sector, which have rapidly improved incomes and financial conditions for the agricultural sector in 2020. Bankers and industry leaders throughout the Ninth District reported that the assistance programs have significantly improved the financial situation of agricultural producers affected by the product. price drops.4 In fact, many noted that producers have been rebuilding working capital and paying off outstanding debts as producers’ financial situations have changed rapidly.
Additionally, commodity prices rose in the second half of 2020 as demand and exports exceeded expectations. Supply constraints have also contributed to higher commodity prices. Price strength continued into 2021, pushing farm sector income to the second highest level on record (see Chart 1; highest was in 2013).
Increase in income and decrease in agricultural loans
Rapidly improving financial conditions for agricultural producers led to higher loan repayment rates and reduced demand for loans, which quickly reduced outstanding loan balances in district agricultural banks. Non-real estate loans outstanding at the end of the first quarter of 2021 were $1.6 billion (21.1%) lower than the same quarter of 2020 (Charts 2 and 3). Outstanding farmland loan debt also declined, albeit to a lesser extent, dropping $1.0 billion (12.2%) over the same period.
Data from the fourth quarter 2021 call report shows that year-over-year changes in outstanding agricultural loan balances are stabilizing at district banks. Non-real estate and agricultural loan balances increased slightly in the fourth quarter, with outstanding non-real estate loans still slightly lower than a year earlier. The rapid decline in outstanding non-real estate loan balances reversed in the second quarter of 2021, at the end of the renewal season of operations and cash flow projections included an increase in production costs. Outstanding home loan balances grew faster than non-home loans as farmland values jumped and increased farmland sales drove up loan balances.
Growth in demand for non-home loans expected in 2022
Given their familiarity with local producers, agricultural bank lenders throughout the Ninth District have detailed knowledge of credit needs in their market areas. Each quarter, these lenders provide us with information on the agricultural market and credit conditions in their trading areas through the Minneapolis Fed Agricultural Credit Conditions Survey.
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Our survey results show similar trends to the data discussed in the previous section and provide additional insights into borrowers’ financial performance, credit needs, and trends in the district’s agricultural economy. After several years of below-average farm income and rising farm debt levels, loan repayment rates have increased rapidly as farm income rose sharply in 2020 (Chart 4). Demand for non-home loans declined as farm income increased, but at a more gradual pace relative to changes in repayment rates. However, survey respondents expect this trend to shift in early 2022 as input and production costs rise rapidly.
Agricultural producers and community banks have a unique relationship due to the cyclical nature of agricultural production. Farm income can vary significantly from one operating cycle to the next, creating financing gaps and additional credit needs for variable expenses. In some cases, weak loan demand can quickly drop to levels that are worrying about bank profitability. In other cases, unexpected expenses can compress initial cash flow projections, increasing demand for additional credit and driving up loan balances. Based on the results of the most recent survey of agricultural credit in the district, it appears that we are approaching the latter.