In its third quarter report, Nate Kauffman and Ty Kreitman of the Federal Reserve Bank of Kansas City predict 2023’s farm income will be reduced due to elevated production costs and a drop in commodity prices. Notably, for the second quarter in a row, farm income and loan repayment rates were lower than a year ago.
“Expenses in all categories (fuel, chemical, repairs, etc.) remain high while commodity prices have dropped,” reports a banker from Southeast Colorado quoted in the report.
The softening of the agricultural economy is more pronounced in row crop areas effected by drought, but Kauffman and Kreitman note areas with concentrations of cattle production are comparatively stronger.
“Drought has significantly hurt our agricultural borrowers and rising interest rates and lower commodity prices are adding to the struggles,” said a banker from Southeast Kansas.
An ag lender from Central Missouri shares, “Severe drought and higher funding costs are concerns for community banking. Most farmers are in good financial condition, but the drought will impact everyone, and inflation is also a big factor.”
As margins have tightened for row crop producers, strong cattle prices have boosted margins for many ranches and feedlots.
“Crop prices have been reduced to breakeven prices or less and dryland crops will be dependent on revenue insurance payments that most likely will be below the cost of production. The bright spot in our economy is the historically high cattle prices,” reports a banker from Southwest Nebraska.
The KC Fed authors report agricultural prices remained above historical averages, but have decreased by about 5% from the previous quarter.
The past two years of strong markets have bolstered the current ag loan performance standard. In the coming months, credit conditions for row crop producers are expected to deteriorate, but survey respondents anticipate conditions to improve for cattle producers with improved repayment conditions for cow/calf producers and feedlots.
The KC Fed reports about 80% of lenders reported repayment was unchanged from a year ago. While 10% of banks reported lower repayment rates during the quarter, it’s worth watching that 20% expect a decline in the coming months.
Despite signs of a reduced rate of loan repayment, credit quality of agricultural loans remained strong across the region and problem loan rates remained at or near historic lows.
As 2023 harvest wraps up, a banker from northeast Nebraska sums up this year’s challenges and next year’s outlook, “Key concerns have been lack of moisture, higher interest rates, lower commodity prices and higher input costs.”
