A majority of lenders responding to a new Farmer Mac survey reported widespread leverage increases over the past year as a result of an overall decline in farm profitability.
In the Winter 2016 – 2017 Agricultural Lender Survey released Monday, nearly 90 percent of lenders reported declines in farm profitability while 84 percent reported higher levels of operating leverage among borrowers as a result. In addition, 63 percent reported increases in the use of the Farm Service Agency’s Guaranteed Loan program.
The perceived drivers for the decline in profitability and the overall health of the agricultural economy were largely financial. Asked to rank their top concerns, 95 percent of lenders reported high levels of concern over commodity prices, 88 percent expressed high levels of concern over both liquidity and farm income and 74 percent noted high concern over farm leverage (See chart).
While lenders across four reporting regions “generally expect poor, persistent economic conditions on the farm,” the report noted regional variations due to their reliance on specific commodity markets. A majority of borrowers also remained profitable despite the sweeping declines.
Lenders in the corn belt and plains regions most reliant on commodities with prices currently near cyclical lows – such as corn, soy and cattle – reported the most challenging conditions. While respondents said that 58 percent of corn belt borrowers and 50 percent of plains borrowers were profitable last year, those figures are expected to drop in 2017 to 55 percent and 45 percent, respectively.
In contrast, in the south and west regions, where a majority of borrowers in each were profitable last year, lenders expect most of their clients to remain profitable in the year ahead, at 59 percent and 64 percent, respectively. The report attributes the difference to the fact that farmers in those regions are generally insulated from large commodity price swings by their specialty crop focus.
Also varying by region was the lenders’ outlook on land values. Nearly half of lenders reported land value declines last year, with 56 percent of expecting further declines in land values in the first half 2017. Most respondents expect that decline to be between 0 and 10 percent, while approximately a quarter of respondents expect a more dramatic drop of more than 10 percent over the coming year.
“Lenders in the corn belt and plains are most likely to report a higher percentage drop, while some lenders in the west and south expect a slight increase in values,” the report’s authors wrote. “This highlights the decidedly localized nature of land values.”
The survey, conducted in conjunction with the American Bankers Association, solicited questionnaire responses from more than 350 loan officers, managers and executives representing institutions with anywhere from under $50 million to over $5 billion in assets.