Ag Bankers: Farm Profitability Still Down But Improving

Posted on 10/31/2017 2:22 PM

Ag bankers are slightly more optimistic, despite continuing farm profitability difficulties, according to a survey by the American Bankers Association and the Federal Agricultural Mortgage Corporation. The survey found 82% of agricultural bankers reported a decline in farm profitability in the last 12 months. Despite the continued decline, the survey of more than 580 ag bankers revealed the agricultural loan approval rate is 84%.

"We were encouraged to see that lenders remain ready to assist farmers and fulfill their credit needs despite the drag in the agricultural economy," said Brittany Kleinpaste, director of economic policy and research at ABA. "Overall, the data showed that agricultural lenders are a little more optimistic about what's ahead for their customers than they were in December of 2016."
While a high percentage of ag lenders continue to report a decline in farm profitability, 7% fewer reported a decline compared to the December 2016 ABA/Farmer Mac survey. However, the drivers of industry stress remain the same. Ninety-three percent of lenders indicated commodity prices are a top concern. Grain and dairy remained the sectors that lenders are most concerned about, while lenders reported less concern for the cattle and hog sectors than in the previous survey. Other top concerns are liquidity (87%), farm income (85%), farm leverage (77%) and weather (56% percent).

On average, survey respondents exhibited more confidence in stable land values than in the December 2016 survey. Fifty-seven percent of respondents reported stable values in the first half of 2017, and 51% expected no major changes in the second half of 2017. Lenders reported that a high percentage of average quality land (41%) and cash rents (32%) are above fair market value in their area.
"Inherently, farm real estate is highly localized and values depend on region and land productivity; however, overall, lender sentiment regarding the strength and stability of farmland values is consistent with USDA and Federal Reserve data," notes Jackson Takach, Farmer Mac's in-house economist.

During the past six months, 51% of lenders noted an increase in the demand for agricultural operating loans, while 57% noted there was no notable change in the demand for agricultural real estate loans compared to the previous survey. In the next six months, 53% of lenders expect a continued increase in agricultural operating loan demand, and 60% expect demand for agricultural real estate loans to remain unchanged.

When asked about challenges facing their own institutions, lenders indicated that credit quality and deterioration of agricultural loans are their top concerns. Competition from other lenders was also among lenders' top concerns facing their institutions, particularly in the South.

Some lenders noted concerns regarding loan demand. A few lenders indicated that heavy loan demand has forced institutions against their lending caps, while others said consolidation of the farm economy due to the lack of individuals available to replace retiring farmers could lead to weakening loan demand.

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