Ag Lenders Trudge Forward, Despite Weakening Economic Trends

Iconic singer John Mellencamp is well-known for his advocacy for farmers, and his song "Rain on the Scarecrow" is a powerful anthem about the struggles of American farmers. Released in 1985, the song highlights the financial hardships and emotional toll faced by farming families, particularly during the farm crisis of the 1980s. So much about farming has changed in the past few decades, from new technology to sustainability practices.Yet, the more things change, the more they stay the same in American agriculture. Despite relatively solid credit conditions and the distribution of government payouts to bolster farms in recent years, some economic trends are hindering the industry. Rising production expenses and thinner margins on commodities — especially for producers of crops like corn and soybeans — are increasingly impacting the agricultural sectors and the lenders that support them. A recent Ask the Fed webinar from the Federal Reserve Bank of Kansas City hosted economic experts who further examined these economic conditions in agriculture and the implications for the financial institutions that serve them. About one-third of banks within the Kansas City Fed coverage area are “ag banks” with a high concentration of farming communities and customers.Agricultural banks remain relatively strong and there have been only modest declines in the credit conditions in this sector recently, according to the webinar’s main presenters, Nathan Kauffman, senior vice president and Omaha branch executive, and Nicholas Hatz, assistant vice president from the Kansas City Fed. However, margins are thinning (especially for crop producers) and production costs are increasing. The Tariff Impact on AgricultureCompounding the trends of low margins and high costs are the large amounts of uncertainty with respect to trade and potential reciprocal tariffs, which could be levied by other countries in response to US-imposed tariffs. The potential short-term effects are difficult to predict, but the long-term results could “spark demand.” Yet, there’s a greater concern that US crop producers will lose customers due to the cost of reciprocal tariffs. Reciprocal tariffs on US agricultural exports could impact US crop producers, since they export 40% of their soybeans to other countries (particularly China) and 18% of their corn, mostly to Mexico. Kauffman noted that at this time, “It’s hard to read through the noise” to determine what the impact will actually be.What does that mean right now for ag lenders? “I’m not saying the sky is falling, but agricultural credit risk is increasing,” Hatz said, in relation to decreasing commodity prices and “sticky export costs.” Agricultural Credit TrendsWhile the financial stress on agricultural credit has been relatively modest so far, more signs of financial stress are beginning to emerge, including loan repayments on the decline (while farm household spending remains steady) and more borrowers carrying over increased debt from the first quarter of this year. Meanwhile, loan and deposit growth has remained healthy at ag banks, despite interest rate changes since 2022, according to Hatz. A growing number of bank loans to farmers are being restructured to meet liquidity needs, which Hatz said may be a “concerning” direction. “Debt has been rising, but the asset side is pretty strong, mostly supported by the value of [farmers’] land,” Hatz said. He pointed out that land values for most ag borrowers is almost double what they were in 2010. Farm Income StrugglesFarm incomes lately have been buoyed by financial aid from the US government, coming from the Emergency Commodity Assistance Program — which Kauffman said provides as much as 50% of the income for some struggling farms. Also, purveyors of livestock are typically faring better than their counterparts growing corn, wheat, and soybeans, since there’s less bottom-line pressure on cattle, hogs, and “broilers” (poultry), driving up costs and compressing the margins. Even within the livestock segment, there are key differentiating factors: Beef prices have increased more than poultry and pork, part of the effect of recent rapid inflation.“Crop producers are facing more challenges,” Kauffman underscored, citing a significant “disparity” between crop and livestock farmers, since there’s more overseas competition, especially from South American crop farmers. “There’s been some pickup in broilers, but we’ve seen a persistent decline in crop prices.” Meanwhile, the selling prices for corn and soybeans have fallen to the point that many of these US crop producers “would not break even except for [receiving] government payments.”Arguably, farmers and ag banks are simply experiencing the trough in an ongoing, up-and-down economic cycle, with financials gradually on the decline in American agriculture since 2022. This trend comes after having experienced typically strong financial results particularly between 2010 and 2014, before slowing during the pandemic, even in the wake of “market facilitation programs” rolled out in 2018 and 2019. American agriculture is grappling with rising production costs, declining crop margins, and uncertainty from trade and tariffs, creating growing economic pressures. While agricultural banks remain relatively stable, financial stress is increasing as loan repayments falter and debt restructuring becomes more common, highlighting the industry’s fragile yet resilient state.Agricultural lenders should closely monitor loan repayment trends, debt restructuring rates, and land values as indicators of financial stress in the sector. Keeping a pulse on commodity price movements and trade developments is also critical, as these factors directly affect their clients' profitability and credit risk. Proactively engaging with borrowers to assess liquidity needs and adjust lending strategies could help mitigate risks during this challenging phase for agriculture.