Farmers have seen a rapid recovery as higher commodities prices, government stimulus and improved land values have provided much-needed relief after struggling through a difficult operating environment. But for banks, stronger conditions for farmers should translate to fewer lending opportunities.
In recent years, farmers have been plagued by adverse weather events, a trade war with China and low commodities prices. But farmers are enjoying much more favorable conditions in 2021, especially since many operators cut costs to increase efficiency and then commodity prices improved, said Brian Philpot, president, CEO and principal owner of AgAmerica Lending LLC, a farmland mortgage lender.
"It's amazing how quickly things have turned," Philpot said. "It's sort of a deep breath."
In the first quarter of 2021, agriculture lending fell to the lowest level since the first quarter of 2016. Loans secured by farmland totaled $101.60 billion, the lowest since the first quarter of 2018, and agricultural production loans, or those for inputs into production such as seeds or other materials, were $68.05 billion, the lowest since the first quarter of 2014.
An influx of cash from government stimulus programs, combined with increasing commodities prices, have led to stronger farm income, said Ben Brown, senior research associate in agricultural and applied economics at the University of Missouri's College of Agriculture, Food & Natural Resources. And although interest rates remain low, farmers are less interested in borrowing.
"We're probably not seeing as strong returns at the banking level, just from the standpoint that they make money by giving loans," Brown said in an interview. "We're seeing a pullback in loan demand."
Banks might be able to find lending opportunities in agricultural real estate. Farmland values in the Midwest increased 7% year over year in the first quarter, according to the Chicago Federal Reserve, which looked at farmland in its district. The survey also showed nearly three-quarters of respondents expected farmland values to continue increasing.
"We're expecting to see increased real estate debt here over the next several years," said Philpot, adding that inflation concerns could increase demand for hard assets such as farmland.
The one lagging area of farming is livestock producers, Brown said, who have suffered from labor shortages at the meatpacking stage of the process. The COVID-19 pandemic accelerated packing plant closures, and Brown said the industry's labor shortage issues could prove to be a lasting side effect of the pandemic. And one of the largest meat processing companies, JBS SA, had to shut down production this week after suffering a cyberattack that government officials believe originated from criminals in Russia.
Over the last year, packing and processing plants have sped up the pace of automation to accommodate for the lower labor participation, Brown said.
Meanwhile, the trade war may have lasting effects on the agriculture sector as well, Brown said. "The trade war pushed our competitors to increase production," said Brown. For the current season, poor weather conditions in those parts of the world has overshadowed the increase in capacity, allowing the U.S. to export more agriculture products.
But Philpot said it may be too early to discern the lasting effects of the trade war, especially as farmers wait to see how the Biden administration will handle trade with China.
In the meantime, farmers are feeling optimistic about the high prices and good weather while they last.
"We expect this period of prosperity in ag prices to be rather short-lived, but it could last another year," Brown said. "We're not expecting this to be a new plateau."