The US Farm Credit System’s Q1 update presents a two-sided story.
On the one hand, the credit system, which is made up of two government-backed entities – a nationwide network of cooperative banks and the Federal Agricultural Mortgage Corporation (Farmer Mac) – ended 2021 in very good shape.
The FCS loans portfolio grew by more than $28 billion for the second year in a row as it closed out the calendar year with a portfolio worth $342 billion as of December 31 2021, up from $315 billion in December 2020. Nonperforming assets as a percentage of loans and other property owned also moved in the right direction, falling from 0.60 percent in 2020 to 0.46 percent last year – its lowest level since Q4 2007.
So, the numbers paint a generally healthy picture of US farm debt positions at the end of 2021.
On the other hand, the report’s analysis of the economic conditions affecting farmers and the FCS since the beginning of 2022 suggests the industry is in for a more challenging year.
For a start, inflation remains high for consumers and producers, with the consumer price index up by 7.9 percent in February from a year prior. Meanwhile, the producer price index for the same period rose by 10 percent.
Elsewhere, macro trends that can either be directly attributed to covid-19 or were accelerated by it – such as rising oil, shipping and fertilizer prices – have received a further upward jolt due to Russia’s invasion of Ukraine.
The pressure on balance sheets is expected to increase farm debt – the quality of this debt can only really be scrutinized in 2023 – at a time when the Federal Reserve has raised interest rates by 0.25 percent, leading the FCS to conclude that “rising interest rates combined with the increase in farm debt [will] put pressure on farm income in 2022 and beyond.”
Those in the US Midwest and the West Coast have the additional challenge of a drought to deal with, as California’s state water allocation is expected to be cut to zero percent, with the widespread drought also affecting livestock forage availability, while the winter wheat crop and the Corn Belt also face water scarcity concerns.
For those able to get seeds in the ground and harvest a decent crop, the promise of selling into a market where corn prices are at the highest since 2013 is an attractive prospect – although volatility remains high – while wheat prices have continued to trade strongly due to supply constraints elsewhere.
Livestock farmers are also set to benefit from higher food prices, with hog, broiler and dairy margins all expected to insulate farmers from increased feed costs. Cow-calf margins, meanwhile, will be heavily influenced by pasture conditions, as 61 percent of US cattle were in drought-impacted areas in February, which is twice the level of late summer 2021, according to the FCS.
All of which combines to present a challenging outlook in 2022 for US farmers – but they can take some encouragement from the healthy position they worked themselves into at the end last year. After all, farmland is an asset famed for its ability to absorb shocks.