Weak commodity prices, high interest rates and persistent inflationary pressures could reduce farm incomes for the second consecutive year in 2024. This could impact agricultural borrowers' ability to service their debts and pose challenges for banks in terms of loan defaults.
“How do farmers cope with all this? That’s the 800-pound gorilla in the room,” said Curt Covington, senior director of institutional credit at AgAmerica Lending, a specialty agricultural lender in Lakeland, Florida.
At issue: U.S. farm incomes could fall 26% to $116.1 billion this year after falling 16% in 2023 due to a drop in prices for many crops, the U.S. Ministry of Agriculture in a February forecast. This would follow a record income year in 2022, in which farmers earned a combined $185.5 billion.
For example, prices for corn and soybeans, which are crucial to the fortunes of farmers across the Midwest, were both down about 10% earlier this year after falling in 2023 due to bumper crops, oversupply and declines in export demand China and other countries had double-digit declines in economies that were slowing.
U.S. farmers boosted crop production in the early days of Russia's invasion of Ukraine in 2022 to meet a sudden surge in global demand. Agriculture-intensive Ukraine's crop exports were restricted, and American producers helped fill the gap. But supply was too great, and as parts of the global economy weakened, demand fell last year. Crop prices followed suit.
In addition, while simmering inflation has improved significantly since peaking in 2022, it continues to keep the cost of everything from labor to equipment relatively high, making it too costly for many farmers to grow profitable crops this year .
Against this backdrop, agricultural bankers and economists say more farmers could struggle to cover their costs and loan payments, increasing credit risk.
“Some farmers are going to get into trouble with their lenders,” Covington said.
The Purdue University/CME Group Ag Economy Barometer, a measure of farmer sentiment, showed a reading in January that was 18% lower than the same month last year.
“Farmers’ reference to lower commodity prices and lower farm income in 2024 significantly influenced the decline,” said James Mintert, director of the Purdue Center for Commercial Agriculture.
“For the first time, the percentage of producers who chose lower commodity prices as their primary concern matched the percentage of producers who chose higher input costs. This consensus shows that U.S. farmers are concerned about potential cost/price pressures,” Mintert added.
This year, more farmers could delay investments – and loans for investments – and spending, hurting the economies of surrounding communities. The rural economy of the central and western United States relies on farmers and agribusinesses spending their profits with local businesses. Without these expenses, business owners could struggle and ultimately be unable to make their own loan payments.
Creighton University's February Rural Mainstreet Index, an economic indicator for a 10-state agricultural region in the central U.S. stretching from Minnesota to Arkansas, showed bank bosses growing increasingly concerned about worsening conditions.
The index reading for February fell to 46.2 from 48.1 in January. The index ranges from 0 to 100, with a value below 50.0 indicating a contraction. The index was below 50 for the sixth month in a row.
“Higher interest rates, weaker agricultural commodity prices and a credit crunch are having a significant and negative impact” on farmers and rural businesses, said Creighton economist Ernie Goss.
Jeff Bonnett, CEO of the $302 million-asset Havana National Bank in Havana, Illinois, said weak commodity prices are an increasingly important issue.
Corn prices, for example, “that are $1.50 to $2.00 per bushel below breakeven” are “obviously not sustainable” for farmers, said Bonnett, who participated in the Creighton survey.
Jim Eckert, CEO of the $47 million Anchor State Bank in Anchor, Illinois, also responded to the survey with caution. “Our farmers do not expect to have very profitable operations in 2024. Although some input costs have fallen compared to last year, weak grain prices for the 2024 crop are depressed and are expected to remain so, he said.
Others in the industry said that while 2024 could prove difficult, most companies that actively lend to the agricultural sector are emphasizing to borrowers the need to save during periods of strong profits to weather recessionary periods.
Bruce Lee, president and CEO of $19.4 billion Denver-based Heartland Financial USA, a prominent Midwest agricultural lender, said the agricultural industry is an industry that banks should commit to for the long term. Over the decades, the sector tends to evolve, offering banks solid returns. But short-term ups and downs are common.
“You don’t just jump in and out,” Lee said. “If you want to be in agribusiness in the Midwest, you have to be committed to the business.”
AgAmerica's Covington agreed. He said that during times of low prices, crop producers tend to pull back to keep spending under control and match supply with demand. Once this happens, prices will recover and agricultural profitability will soon arrive. Even though credit losses in the agricultural sector could rise this year, he does not expect an impending crisis or even a sustained slump.
“Low commodity prices typically don’t last long,” Covington said.
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