Farm lending strong in 2023, but ‘tougher’ year ahead

Corn fields growing under a cloudy sky. Sai Srinivasan, chief economist at the American Bankers Association, warned that “the agricultural sector will continue to face ongoing challenges due to U.S. monetary policy actions to target inflation and reductions in federal support.”

Bloomberg Creative Photo/Bloomberg Creative

Rising production costs and weaker commodity prices coincide with direct government payments returning to pre-pandemic levels and Interest rates soar, by 2023, farmers’ profitability will decline.But this boosted demand for farm loans to help Pay operating expensesaccording to the American Bankers Association Annual Agricultural Bank of China Performance Report.

The ABA said farm lending by U.S. agricultural banks, institutions that specialize in the industry, rose 6.7% from the previous year to $110 billion.

“Agricultural Bank of China will continue to maintain solid performance in 2023, with strong loan growth. Delinquency rates are at historic lows“, said ABA Chief Economist Sayee Srinivasan.

The ABA said that by 2023, 98.1% of agricultural banks will be profitable, with 53.5% of them reporting an increase in profits. Agricultural Bank of China’s median non-liquidity rate edged up 3 basis points to 0.23% in 2023, judging from the previous year’s historically low delinquency rate. This includes loans that are 90 days or more past due and loans with non-accrual status. By comparison, the broader banking sector’s non-current loan ratio was 0.27%, the ABA said.

The association’s report, which analyzed data from the Federal Deposit Insurance Corporation and the U.S. Department of Agriculture, examined the performance of 1,442 banks across the country that specialize in agricultural lending. The ABA defines agricultural banks as banks with domestic agricultural loans as a proportion of total loans and a domestic loan size greater than or equal to the industry average.

Many of these banks are community lenders that serve small farm operations. The report found that farm-owned banks had 639,694 small farm loans valued at more than $44.6 billion at the end of 2023, including $9.2 billion in small farm loans at the end of 2023. The ABA said a small farm loan is one with an original value of less than 50 Loans of $10,000 or less and micro farm loans of $100,000 or less.

However, the USDA warned in its own report that there could be a tumultuous year ahead Last month’s annual outlookThe report predicts that U.S. farm income may fall 26% this year to $116.1 billion after falling 16% in 2023 due to plummeting prices for many crops. Income will reach a record high in 2022, when farmers will earn a total of $185.5 billion. Global demand surged during Russia’s invasion of Ukraine and caused supply disruptions in Europe.

But U.S. supply grew too quickly in 2022 and last year. As the economy recedes in parts of the world, demand falls and crop prices fall. Pandemic-era government aid programs for farmers were also scaled back last year.

More importantly, although inflation has fallen from its peak in 2022, it is still high, so the Federal Reserve will keep interest rates near the highest level this century to deal with high prices. Borrowing money is much more expensive In some cases, it has become more difficult for farmers to repay their debts, which could increase the threat of bank credit losses this year.

this Purdue University/CME Group Agricultural Economic BarometerThe February reading on a gauge of farmer sentiment was 11% lower than a year earlier.

“People expect 2024 to be a tougher year,” said James Mintert, director of the Center for Commercial Agriculture at Purdue University.

ABA agrees.

“Looking ahead to 2024, the agricultural sector will continue to face challenges due to monetary policy actions in response to persistent inflation in the United States and reduced federal support,” Srinivasan said.

He added that Agricultural Bank of China has built strong capital reserves, maintains liquidity and is prepared to deal with potential economic headwinds. According to data from the Agricultural Bank of China, Agricultural Bank of China’s equity capital increased by 14% to US$47.2 billion in 2023, and its tier one capital increased by 6.8% to US$53.7 billion. Abba.

The entire banking industry (not just Agricultural Bank of China) provides loans to the agricultural industry. U.S. banks held nearly $199 billion in farm and ranch loans at the end of 2023, the ABA said. According to its report, the bank held more than 1.1 million small loans worth $70 billion in agricultural loans at the end of 2023, including more than 687,000 small loans worth about $15 billion.

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