MILWAUKEE (DTN) -- Agricultural lenders are less optimistic that their farmer borrowers will remain profitable this year.
A decline in profitability overall concerns bankers, though that varies by region and commodities. Lenders to livestock producers are more optimistic than bankers lending to crop producers. Overall, lenders also are concerned producers' credit will deteriorate in the coming year.
Those were a few of the key findings from the 2024 Ag Lender Survey report produced jointly by the American Bankers Association and the Federal Agricultural Mortgage Corporation, more commonly known as Farmer Mac.
Breaking it down, agricultural lenders expect only 58% of their borrowers will remain profitable in 2024 compared to 78% last year. Flipping it around, lenders expect 42% of their agricultural borrowers will not make a profit. A growing number of lenders also expect to tighten credit standards in the next 12 months.
Looking ahead to 2025, ag lenders overall forecast just 51% of producers will be profitable, the lowest number from the survey since 2020.
That coincides with other data released at the American Bankers Association's Agricultural Bankers Conference this week in Milwaukee. An analysis highlighted at the start of the conference showed the typical corn and soybean farm in the upper Midwest will show financial losses in 2024 and 2025.
"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 American Bankers Association. "Lenders are taking prudent steps to manage risk such as tightening underwriting standards, and they remain committed to working with and supporting their borrowers."
The combination of lower export demand for U.S. agricultural goods and the rebound of global inventories put significant downward pressure on global commodity prices and U.S. farm incomes, according to the Ag Lenders survey.
"The agricultural economy is inherently cyclical, and ag lenders are navigating the changing conditions across the sectors they serve," said Jackson Takach, chief economist of Farmer Mac. "While the responses highlight slowing land values and a profitability shift from crops toward animal proteins, ag lenders remain steadfast in leveraging their resources and relationships to guide producers through all parts of the cycle."
The survey, in its ninth year, had more than 450 responses from agricultural lenders at banks from around the country, ranging from less than $50 million in assets to more than $1 billion. Roughly half of the bank respondents come from the Corn Belt, and another one-quarter are in Plains states.
Other key findings from this year's survey report include the following.
LAND VALUES AND CASH RENTS
Lenders expect land values and cash rents may plateau or decline over the next year.
Farmland values continued to rise in 2024, albeit at a slower pace than in previous years. A majority of lenders across every region expect declines or no increases in land values in 2025.
"What we have seen is a relative leveling off of farmland on a national scale," said Blaine Nelson, a senior economist at Farmer Mac, at a discussion early in the conference.
TOP LENDER CONCERNS FOR PRODUCERS
Liquidity and farm income remained atop the list of lender concerns for producers. Meanwhile, lenders expressed less concern this year about inflation, weather and other factors affecting producers.
The No. 1 concern facing lending institutions in 2024 was credit quality and agricultural loan deterioration. Lender competition and interest rate volatility were the second- and third-greatest overall concerns, respectively.
Concern levels about credit quality spiked in 2024 for several sectors, including grains, fruits and tree nuts. On the other hand, lenders are more comfortable about the situation in dairy, beef and poultry. The changes largely reflect how the farm income outlook has shifted within each sector over the past year.
LOAN DEMAND RISING
Demand for loans secured by farmland and agricultural production loans increased in 2024. Lenders anticipate loan demand for both categories will continue to increase over the next 12 months.
Survey respondents reported ag loan delinquencies and charge-off rates remained stable in 2024. However, lenders expect credit quality to deteriorate over the next 12 months, as farmers may face a more challenging environment in the year ahead. As a result, a higher share of lenders plan to tighten underwriting standards and loan terms for agricultural credit.
Lenders reported an average agricultural loan application approval rate of 86% for new loans in the 12 months leading up to August 2024 and expect the approval rate for renewal requests to be 88% in the following 12 months.
Bankers also said they expect to lean a little more into USDA's guaranteed loan programs for farmers in the coming year. Guaranteed loans help farmers qualify for credit and reduce the risk for producers. FSA has 115,000 guaranteed and direct loan customers. FSA will have a guaranteed loan limit of $2.251 million in 2025.
WHAT FARMERS WANT TO INVEST IN
Bankers were asked about whether borrowers expressed interest in financing new technology or regenerative agricultural practices. In the prior 12 months, two-thirds of lenders reported that a borrower inquired about financing precision technology, such as equipment guidance, automatic steering, yield monitoring or in-field electronic sensors. Nearly half of lenders reported that a customer inquired about reduced-till farming or cover cropping. Roughly 40% of lenders received inquiries about livestock grazing, crop rotation, automation technology or alternative energy projects.
Takach pointed out farmers and ranchers are increasingly relying on variable rate loans. The shift to variable rate loans has been dramatic. This year, 87% of loans to producers were variable rate loans with just 13% having fixed rates. Just two years ago, the ratio was 78% fixed rate and 22% variable rate. The variable rate is cheaper today, but it does expose producers to some risk, Takach said.
For agricultural borrowers, rate cuts could help alleviate some of the pressures weighing on farm profitability. Unsurprisingly, interest rate volatility remained among the top three concerns facing lenders this year.
Also see "Financial Strain for Midwest Farms Could Demand Heightened Scrutiny From Bankers" here: https://www.dtnpf.com/….
And see "AFBF Pushes for Economic Aid to Support Farmers as Farm Bill Stalls" here:
https://www.dtnpf.com/….
Chris Clayton can be reached at Chris.Clayton@dtn.com
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