Ag credit quality deterioration unlikely to reach 1980s levels – Fitch

Agricultural credit quality is expected to deteriorate in the aftermath of the coronavirus but remains unlikely to reach depths seen in the 1980s, according to Fitch Ratings analysis.

Deterioration of credit quality in US agriculture could match or exceed levels seen during the global financial crisis, said managing director Julie Solar in a report by the ratings agency’s credit policy group.

However, Fitch expects that coronavirus-related relief packages, crop insurance and the use of lower leverage in the sector will help keep debt-to-equity ratios from reaching highs seen in the 1980s.

Fitch expects the 41 percent share of agriculture-related debt already held within the Farm Credit System to rise in the coming years, as the system expands to meet its mission as a government sponsored entity.

Growth in the number of delinquent or non-preforming loans is unlikely to affect credit ratings as the ratings of Farm Credit System lending institutions are tied directly to US sovereign ratings, wrote Fitch.

The majority of the small commercial banks that make up an additional 42 percent of outstanding agricultural debt are not rated by Fitch and could be challenged by continued credit-quality deterioration, according to the report. It highlighted that there are more than 1,200 such banks with agricultural exposure equal to more than 100 percent of total capital, 350 of which have ag and farmland exposure comprising more than 300 percent of total capital.

By contrast, the approximately $7 billion in ag-related exposure held by Wells Fargo, the largest lender among those for which Fitch provides ratings, amounts to just 5 percent of its capital.

“Any ratings actions on these Fitch-rated banks will likely be due to idiosyncratic issues and not necessarily deterioration in the ag sector,” Solar wrote.

Solar told Agri Investor that most of the large lenders Fitch rates have decreased their agricultural exposure in the last few years, as low commodity prices and trade tensions have led to a downturn in the US ag economy since around 2014.

The pandemic itself, she added, is unlikely to lead lenders to make strategic decisions about entering or exiting agricultural lending entirely. Those with existing loans to agricultural producers, said Solar, are already being encouraged by regulators to find ways to work with challenged borrowers.

“I would find it hard to believe that a US bank right now would want to quit extending farm credit in an environment where that is such an incredibly important need of Americans,” she added.