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For Ag Lenders, Farm Outlook Warrants Watching

Mary Ellen Biery
June 29, 2022
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Ag Sector Outlook Presents Opportunity and Risk for Lenders 

Higher prices for agricultural producers and continued gains in farmland values are meeting rising interest rates and input costs.

You might also like this webinar, "How to Position Yourself for High-Yielding Ag Loan Growth."

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More Unpredictable Than 2019-2021

The general U.S. agricultural sector outlook

The economic and financial outlook for U.S. farmers is even more unpredictable than in recent years, so financial institutions will want to keep a close eye on the agricultural sector -- both to protect ag lending portfolios and tap into ag loan growth opportunities.

Higher prices for agricultural producers and continued gains in farmland values are meeting rising interest rates and input costs and the uncertainty that has come with Russia’s invasion of Ukraine, reminding us that shifts in farm and ranch income can occur quickly. Any swing in income at the producer level may create additional ag credit needs for operating expenses or pressure credit quality.

Either way, ag lenders and producers will have much to monitor in the ag sector outlook heading into the second half of 2022.

Pandemic-Related Stimulus Ends

Farm sector seeing reduced payments

The U.S. Department of Agriculture’s (USDA) first outlook on 2022 for the ag sector, its February Farm Sector Income Forecast, projected that after two years of 20%-plus growth, net farm income could drop by 4.5% to $113.7 billion in 2022.

The forecasted drop in the bottom line was driven by the winding down of pandemic-related stimulus payments but higher commodity prices. Both payments and higher prices had helped ag producers in 2020 and 2021 generate their highest levels of net farm income since 2013. Estimated net farm income was $119.1 billion in 2021 and $95.2 billion in 2020, according to the USDA farm sector outlook.

At the individual farm business level, the USDA in February forecasted a 1.8% increase in average net cash farm income, to $91,500 in nominal terms. Net cash farm income is not a comprehensive measure of profitability since it excludes changes in non-cash income, including adjustments in accounts payable, accounts receivable, farm inventory, the imputed rental value of operator dwellings, and capital consumption.

Farm businesses are farms with an annual gross cash farm income of at least $350,000 or where farming is the operator’s primary operation. The USDA says farm businesses account for more than 90% of the farm sector’s production value and hold most of its assets and debt, even though they account for only half of U.S. farms.

In February, increases in average net cash farm income in 2022 were projected for cotton, soybean, and corn farmers. Farm businesses specializing in specialty crops, wheat, and other crops were expected to see declines in average net cash farm income.

Soon after the February forecast was issued, however, Russia invaded Ukraine.

Commodity Prices Surge

Lenders seeing quickly changing ag outlook

Russia’s invasion and policy responses affecting trade sent global commodity markets into turmoil, given those countries’ production and export of wheat, corn, oil, and natural gas. In addition, the Federal Reserve increased the federal funds rate in May and June, boosting it by 125 basis points and pledging additional hikes if necessary to contain inflation.

With the USDA’s next Farm Sector Income Forecast not published until September, this article examines the February expectations and factors that will likely influence the updated ag sector outlook.

 

Ag receipts higher on pricing, volume

February’s farm sector forecast said direct government farm payments this year would drop 57% from last year’s levels as the disaster assistance and supplemental help tied to the coronavirus ends. Direct government farm payments, which exclude USDA loans and insurance payments from the Federal Crop Insurance Corp., were more than one-tenth of gross cash farm income in 2020. This year, direct payments were expected to be around 2%, which is closer to the 2015-2018 average of about 3%.

Despite the return to more normal levels of direct government support, farm cash receipts were forecasted in February to be up by nearly 7% to $461.98 billion in nominal dollars. “In 2022, both increasing prices and quantities sold are expected to have positive effects on cash receipts,” the USDA’s Economic Research Service said. 

The government expected increased receipts for milk, cattle/calves, and broilers to contribute to nearly 9% growth in animal/animal product receipts (up $17.4 billion to $213.3 billion). It said soybean, corn, cotton, and wheat combined would generate nearly all of the forecasted 5.1% annual growth in crop receipts (increasing by $12 billion to $248.6 billion).

Those forecasts don’t consider the impact of several commodity prices surging to historically high levels after Russia’s invasion. The Kansas City Fed reported in May that wheat and corn prices were 60% and 30% higher, respectively, than a year earlier at the end of the first quarter. Ag prices more broadly had jumped 30% from a year ago and rose 12% from the fourth quarter. 

Also since February, more than 40 million turkeys and chickens have had to be put down to control a highly contagious avian influenza outbreak. That prompted the USDA’s economist in May to boost his food price inflation forecasts, saying poultry prices could increase 9.5% and eggs could increase by 25% in 2022.

You might also like this whitepaper with projections for the ag market and tips for lenders: "The Ag Lender's Survival Guide."

Expenses for Farmers, Ranchers

Ag facing higher feed, fertilizer costs

While higher prices can help ag producers, they can also increase input costs for many farmers and ranchers in 2022. Feed expenses are the largest single expense category and, even before the Russian invasion, were expected to increase by 6.1% due to higher prices for feed commodities.

Expenses for another critical input for ongoing operations, fertilizer, lime, and soil conditioner, had been forecasted to jump 12% in 2022. Net rent to landlords was the only production expense category tracked by the USDA that was expected to decline, while seed purchase costs were projected at roughly flat. Below are the USDA’s February forecasted changes in selected other ag expenses for 2022:

  • Labor: 5.9%
  • Livestock/poultry purchases: 6.8%
  • Seed purchases: -0.3%
  • Interest: 10.4%
  • Net rent: -6.6%
  • Pesticides: 1.8%
  • Property taxes/fees: 1.4%
  • Fuel/oil: 2.1%

Kansas City Fed researchers in late May reported, “Farm production expenses, which had already been on the rise, increased even more sharply in the first quarter…. Most notably, fertilizer and diesel expenses rose 90% and 60%, respectively, from the previous year in February. Feed expenses also climbed 15% alongside higher prices for grains and oilseeds.” The chart below is from their report on the impact of commodity market disruptions as a result of Russia’s invasion of Ukraine.

farm outlook for ag lenders includes production expense chart

Related Subhead

Farm sector outlook includes higher land values

Another May report from the Kansas City Fed said lenders in the Tenth District reported farm income continued to improve along with commodity prices. However, less than 60% expected an increase in the coming three months.

“Conditions were expected to deteriorate during the next quarter in Oklahoma, where extreme drought continued to affect large portions of cattle and livestock production areas,” the Kansas City Fed said.

Collectively, farmers and ranchers will be facing more than the usual number of unknowns in 2022.

The good news is that farmland values have continued to climb to record levels, even through the first quarter, and the Tenth District reported cash rents that were 15% above a year ago. The February USDA forecast said farmland values would increase about 1% in nominal dollars, and non-real estate farm assets (investments, inventories, and machinery and equipment) were expected to increase by 2.7%.
farm outlook: ag lenders should consider increasing farm values in 2022

Spending also expanded along with farm borrowers’ strong liquidity and broad inflationary pressures, even though it was expected to increase at a slightly slower pace in the months ahead, Kansas City Fed researchers said.

Ag lending could deliver attractive opportunities for financial institutions despite risks tied to the agricultural sector’s economy. Efficient business development and ag loan processing, as well as keeping up with ag borrowers’ changing needs and circumstances, will be vital given the uncertain environment and shifting farm sector outlook.

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

listen to the podcast
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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