The State of Agricultural Lending in Mid-2024

Farmers and ranchers have always held a special place in the hearts of many Americans — even from the start. Indeed, Thomas Jefferson in 1781 remarked that the “cultivators of the earth are the most virtuous and independent citizens.” Several years later, he emphasized in a letter to James Madison that farmers and small landowners were vital to the security and economic viability of the United States. Farming and ranching across these 50 states are still as critical for America’s livelihood as they were when the country was in its infancy.Trends in Agricultural LendingAgricultural lending in 2023 was challenging, partly due to higher interest rates that dampened loan demand. However, farmers are signaling that they’re ready to borrow again, despite tough growing and borrowing conditions. This renewed borrowing interest comes amidst a backdrop of financial strain, as farm sector profitability is expected to drop by 27.1% in 2024, down to $116.1B when adjusted for inflation. According to ABA's Chief Economist Sayee Srinivasan, this decrease is due to monetary policies targeting persistent inflation and reduced federal support.In Q1'24, agricultural credit conditions showed signs of weakening with rising nominal interest rates. Adjusted for inflation, these rates were the highest since 2009. Demand for non-real-estate farm loans was strong, but funds availability was tighter, and the loan-to-deposit ratio rose, reflecting reduced working capital and greater borrowing needs. According to a number of agricultural lenders, loan renewals and extensions increased, while rates of loan repayment declined.Rising Demand for Farm LoansThe increased demand for non-real estate farm borrowing noted in the fourth quarter of 2023 has continued in H1’24, and in some areas of the country, loan demand has even increased YoY. This uptick suggests that agricultural loan applications continue to be in high demand, driven by the need for operating credit as working capital positions tighten (reflected in lower farm income). Despite the strong loan demand, the downside continues to be the availability of credit in the market and the elevated cost of capital, which continues to be at some of the highest rates in over a decade.Current Economic Conditions and Their ImpactThe agricultural economy faces a challenging environment with declining incomes, increased loan demand, and tighter credit conditions. However, strong cattle prices and stable farmland values provide some relief. Farm loan interest rates have remained relatively stable and slightly above historical averages, offering predictability for producers reliant on financing.Despite broader economic challenges, farmland values have continued to grow. On average, farmland values have increased by 5% or more from a year ago. Cash rents on all types of land have also grown modestly this year. While there are still some hurdles, the agricultural lending sector continues to adapt and evolve to meet the needs of farmers and ranchers. With an anticipated rise in agricultural loan demand, CFIs should stand ready to help farmers manage tighter working capital positions and leverage the opportunities presented by the current economic landscape.