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Ag lending outlook: Prepare for top challenges

Mary Ellen Biery
July 25, 2022
Read Time: 0 min

Strong demand is a factor in the ag lending outlook ahead

Ag lenders can begin taking steps to ensure they are ready to provide positive customer or member experiences for farm borrowers.

You might also like this webinar, "How to position yourself for high-yielding ag loan growth."


Farmers expect worse in 2023

Net farm income to drop 4.5% in 2022

The ag lending outlook has its share of uncertainty. But experts say inflation and other factors could converge to drive agricultural loan demand higher in the coming quarters. Ag lenders can cultivate profitable growth in ag loan portfolios by preparing for several of the challenges ahead, including higher interest rates and competition for deals.

The U.S. Department of Agriculture projects a 4.5% decline in farm income in 2022, but that drop could be even larger if supply chain disruptions worsen because of Russia’s war on Ukraine. “As farmers adjust their credit needs in response, banks with a higher share of agricultural loan activity (“ag banks”) may see demand for loans increase,” Kansas City Fed economist Francisco Scott said in a recent research report. Ag banks are those with more than 25% of loan volume tied to agricultural loans.

Over the last decade, changes in farm income had an inverse relationship with both changes in ag bank loans and ag banks’ net interest margins, according to Scott’s research.

Farmers are indeed anticipating worse conditions in 2023.

Over half of U.S. producers responding to Purdue University’s latest survey for its Ag Economy Barometer expect their farms to be worse off financially a year from now -- the most negative response received to this question since the survey began in 2015. Rising input costs and uncertainty about the future continue to weigh on farmer sentiment, the university said.

Rising inputs

Inflation, rates are factors in ag lending outlook.

Examining the ag lending outlook requires a closer check of how input costs and income might drive demand. 

Two of the main expenses for farmers and ranchers – fertilizer and fuel – have had the highest inflation this year, and rising interest rates are also likely to hit their net income, said Rob Newberry, Senior Advisor on Abrigo’s Advisory Services team and a faculty member of the Graduate School of Banking at the University of Wisconsin-Madison.

With high costs for major inputs, farmers won’t want to prepay expenses for the next planting cycle like they did coming into 2022 when pandemic and stimulus assistance and high land values had many of them able to get ahead and perhaps even pay down debt, Newberry said.

“I anticipate – it might not be until the first quarter next year – that loan demand will start picking up,” he said during a recent ag lending webinar hosted by Abrigo. “Depending on how this year's crops turn out this fall, you could actually see a turn to where they might actually have to start borrowing funds again to be able to plant the crops they want.”

That expectation for increased loan demand was echoed by Kansas City Fed Vice President Nathan Kauffman, who testified before lawmakers on July 14. Demand for farm loans in the Kansas City Fed District is expected to rise notably in the coming months for the first time since 2020, he told the House Committee on Agriculture.

The U.S. farm sector appears to be well positioned financially for the remainder of 2022, thanks to the strength of farm incomes from the past two years, he said. However, “some borrowers may face heightened financial stress in the year ahead if costs continue to rise and commodity prices ease further.”


Farm Bill reauthorization could impact ag lending outlook.

Numerous contacts have pointed to large increases in costs associated with labor, in addition to fertilizer and fuel costs, as primary drivers of higher expenses and a less favorable industry outlook.

The House Ag Committee was gathering feedback on the 2023 Farm Bill reauthorization, which will update the 2018 Agriculture Improvement Act. While Congress won’t finalize the reauthorization for months, the Farm Bill is one of the top issues for producers and ag lenders in the coming year, given its impact on price income support, disaster assistance, loan guarantees, and direct government loans.

In addition to monitoring Farm Bill developments, ag lenders can plan for growth while they wait for loan demand to rebound. Designing ag lending and credit operations for growth help meet customers’ or members’ needs more efficiently, with less stress on institutional resources, and most importantly, with the best experience for farmers and ranchers. That’s especially important considering the amount of competition among lenders.

Line up resources

Lenders: prepare for stronger ag loan demand

When the pandemic hit and the federal government rolled out the Paycheck Protection Program (PPP), demand from small businesses was so great that many financial institutions had to scramble and ended up working around the clock to help their communities. Other priorities and projects were put on hold to meet the urgent needs, and the PPP drained staff.

Taking a “wait and see” approach to ag lending preparation could leave the financial institution short-handed at a time when solid underwriting and sound credit risk management are vital.

Below are two steps ag lenders can begin taking now to ensure they are prepared for stronger ag loan demand and can provide positive customer or member experiences.

Learn more about the state of the ag market and strategies to overcome challenges in our podcast, "Ahead of the Curve"

Line up resources to prepare for ag lending growth.

Ag lending is one of the more time-consuming activities at a financial institution due to the underwriting requirements and the fact that so many banks and credit unions are using manual processes. Spreading seven years of financials, developing projections, and putting together a loan committee presentation – all while entering the same data multiple times in multiple systems or on spreadsheets and Word documents – can mean bankers can spend as much time on a $200,000 line of credit for a farm as they can on a $1 million commercial real estate loan, Newberry noted.

Meanwhile, recruiting and retaining talent with specialized experience and the desired level of knowledge is increasingly challenging in banking. Indeed, the Office of the Comptroller of the Currency said recently that combined with strong competition from both banks and nonbanks, staffing challenges present increased risks to banks.

Now is the time for ag lenders to find talent. With some banks and fintech companies letting staff go, it might be an opportunity to recruit new staff and get them up to speed in ag lending. At the same time, financial institutions should continue their digital transformation so they can handle increased ag loan volume more efficiently. Banks and credit unions have found that streamlining lending with ag lending software also enables them to handle increased loan volume without adding staff. Instead of slowing technology investment out of fear of a recession, financial institutions and others should be investing in the right digital initiatives at the right cost, according to research and advisory experts at Gartner Inc. Such moves “can blunt the negative effects of economic pressures in the short term and build long-term competitive advantage,” the firm wrote recently.

Automating the ag loan from application to loan onboarding allows experienced staff to focus on relationship development and higher-level analysis and decision-making rather than sending emails and chasing down documents. Online loan applications also make it easier for farmers and ranchers to apply when it’s most convenient, or for a lender to visit the farm and help fill out the application on a tablet or phone.

Develop and manage relationships with ag borrowers.

Ag lenders know that their relationships with farmers and ranchers go a long way toward winning more loan deals. Considering the current volume of new loan growth, however, retaining good customers or members may be just as important as looking for new ones until demand picks back up.

“If we have a hole in our bucket, it doesn’t matter how much stuff we bring in if we’re not retaining the clients that we have,” Newberry said during the webinar, “How to Position Yourself for Profitable Ag Loan Growth.

Central to being able to keep good loans on the books? Maintaining relationships and proactively managing the portfolio.

One of the first steps for managing borrower relationships should be to determine or revisit what your institution is willing to do to keep existing ag loans. So even though ag lending has been slow for the last two years, now is the time for financial institutions to develop or dust off their retention strategies for loan portfolios.

Know up front what level of return on assets (ROA) or return on equity (ROE) the institution is willing to live with to keep a deal rather than having to find a new ag loan to replace it, Newberry advised.

Be proactive and talk about this with your lenders, he said.

It’s also important to be proactive with your borrowers. Keeping in regular touch with them helps you understand where they are with their supply of stimulus money and might keep you from losing a good customer who is approached by a competitor.

Using credit analysis software that provides narrative reports explaining in plain language how the business is performing or projections of how performance or profitability might change in various scenarios allows you to provide existing borrowers or prospects insight into their farm or ranch’s financial performance. That deepens the relationship and develops lending opportunities.

Newberry also suggests identifying credits that might be resetting in the near future. Even though financial institutions might be leery of interest rate risk, there’s potentially good money to be made.

“If you had [a borrower with] an operating line or you had a three-year balloon or five-year balloon, you might look to see if they’re a good credit and can you maybe you refinance them a little early to take advantage of the interest rate cycle,” Newberry said.

Understanding the loan’s cash flows and your ability to reinvest those at a higher rate going forward, as well as what it actually costs the institution to book a longer-term fixed rate product given rates today, allows the institution to make loans profitably, Newberry said. “You can leverage all the information in the market about raising rates to increase your net interest margin on that loan.”

Loan pricing software can help while creating consistency among lenders and more satisfied borrowers.

Best positioned

Ag lending preparations can pay off

Despite an uncertain ag lending outlook in the near term, experts believe that demand for agricultural loans will pick up in the coming year. Financial institutions taking steps now to prepare rather than waiting for any uncertainty to blow over will be best positioned to win deals and capture growth efficiently.

See projections for the ag market and tips for lenders in "The ag lender's survival guide"

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About the Author

Mary Ellen Biery

Senior Strategist & Content Manager
Mary Ellen Biery is Senior Strategist & Content Manager at Abrigo, where she works with advisors and other experts to develop whitepapers, original research, and other resources that help financial institutions drive growth and manage risk. A former equities reporter for Dow Jones Newswires whose work has been published in

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Abrigo enables U.S. financial institutions to support their communities through technology that fights financial crime, grows loans and deposits, and optimizes risk. Abrigo's platform centralizes the institution's data, creates a digital user experience, ensures compliance, and delivers efficiency for scale and profitable growth.

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