32 JULY / AUGUST 2020 AG BANKING Increased Risk in Agricultural Lending The U.S. Department of Agriculture Economic Research Service projects 2020 farm incomes to be slightly above where they were in 2019. These numbers, however, were calculated before the onset of the COVID-19 pandemic and the release of the Coronavirus Food Assistance Program (CFAP). The Ag Credit Survey, conducted by the Federal Reserve Bank of Kansas City, was released mid-May and provides us with more recent data on bankers’ expectations of their agricultural loans. This survey asks agricultural bankers questions concerning demand for loans, loan repayment rates, renewals or extensions, farm income, farm household spending, and farm capital spending, among other key agricultural economic indicators. This survey uses a diffusion index with 100 as the base value. If a key indicator has a score of 100, the same number of respondents indicated the economic indicator will increase as those who indicated a decrease. A value below 100 means more bankers indicated it decreased, and a value above 100 means more bankers indicated it increased. Farm Income Let’s first look at one of the leading indicators of farm income. The index for farm income fell to a calculated value of 52. This is down from the fourth quarter of 2019, but still above the value reported in mid-2019 when farmers were not able to plant corn or soybean crops across much of the Midwest because of rainfall. Government payments such as the Market Facilitation Program (MFP) and CFAP have bolstered farm incomes and prevented more financial stress. MFP was a significant portion of the average farmers income in 2019. There remain questions, however, about demand for commodities given the continued trade war and pandemic. Suppressing international markets could spell disaster for commodity prices come harvest time. At present, bankers seem to continue their pessimistic outlook for farm incomes in 2020. In addition to farm incomes, the survey asks bankers about farm household spending and farm capital spending. Both of these indexes are down from the end of 2019. This shows that farmers have continued to spend less on household expenses over the past several years while slowing capital expenditures on the farm at the same time. Repayment Rates The index for loan repayment rates was calculated at 71. This means that more agricultural bankers indicated that loan repayment rates decreased in their loan portfolios. This is the lowest this index has been since the third quarter of 2017. Farmers are experiencing more difficulties meeting repayment demands than in the previous two years. The index for loan repayment rate has been steadily decreasing since the first quarter of 2019 a year ago. This decrease is worrisome and is definitely a sign that there is some financial stress within the agricultural sector. If further rounds of government aid are made available, I would expect this number to increase. In addition to loan repayment rates, bankers are also asked about renewals or extensions on loans. This index was at 137 and is the highest it has been since early 2017. Farmers have had more trouble making payments Continued on facing page. Brady Brewer, Ph.D. Assistant Professor, Agricultural Economics Purdue University brewer94@purdue.edu
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