Economist reports agricultural credit conditions during agricultural outlook forum
During the U.S. Department of Agriculture 98th Annual Agricultural Outlook Forum, Federal Reserve Bank of Kansas City, Oklahoma City Branch Economist Cortney Cowley shares information regarding agricultural credit conditions.
Themes in ag credit
“The outlook for the agricultural economy in the U.S. remains solid, but sharp increases in production costs are weighing on expectations for 2022,” shares Cowley. “On the surface everything looks really good and strong, but things such as input cost for farmers has the potential to add pressure moving forward.”
An agricultural credit refers to one of several credit options used to finance agricultural transactions. This could be in the form of a loan, note, bill of exchange or banker’s acceptance.
Cowley shares, “Agricultural credit conditions remain strong and have been supported by high commodity prices and strong demands for U.S. ag products both domestically and internationally. However, ag lenders continue to express concerns related to higher input costs, weak loan demand and severe drought in some portions of the country – adding a little bit of pressure to what has been one of the strongest periods for the ag sector.”
Prices for most farm commodities remain strong heading into the 2022 season. Four of the top agricultural commodities include corn, soybeans, cattle and hogs in western Missouri, Nebraska, Kansas, Oklahoma, Colorado, northern New Mexico and Wyoming.
Domestic and
international support
“Coming into the pandemic, the sector saw a long period of low commodity prices and lower farm income following the ‘boom period,’ 2011 to 2013,” she says.
Post pandemic, prices started rebounding sharply for most commodities, due to domestic and international commodity demand.
“Lower inventories combined with stronger demand really led to strong prices and even though they have come down a little bit in 2021, they are actually expected to pick back up again in 2022,” Cowley shares.
The cattle market saw several difficulties coming out of the COVID-19 pandemic and was slower to rebound, but the market is now seeing an uptick in cattle prices, which has been a good development for the sector as a whole, she added.
Ethanol production has seen a fluctuation in the number of barrels of ethanol sold per day, in the last two years, but is expected to be back to normal post pandemic – where it saw a significant decrease in million barrels per day sold.
Cowley shares, “This is a positive sign for both demand and corn production in the U.S., and is one indicator for demand on the domestic side of things.”
There is really a strong demand across the board for all commodities, as well as meat exports in 2021.
Production costs
Production costs have continued to increase, but transportation costs have eased slightly, she shares.
“We hear from our ag lenders and agricultural producers about the cost of ag chemicals and fertilizer prices and how much those have increased in 2021,” says Cowley. “Machine costs have significantly increased well above the 2016 and 2019 averages. Diesel prices also continue to go up.”
In addition, there were dramatic increases for ocean freight rates for U.S. grain and transportation costs due to supply chain backlogs, bottlenecks and high diesel and fuel costs – those have come down at least a little bit, but still remain elevated and could have an impact on the outlook moving forward, she explains.
“All this being said, when looking at several indicators in ag credit surveys, the first one being farm income, the Federal Reserve Bank readings for farm income are much higher than where they were from 2014 to mid-2020,” she says. “This would indicate a majority of agricultural lenders are saying farm income is higher than it was during the same period a year ago.”
She notes, “Even though a majority of bankers are reporting farm income is expected to be high, the rate of the increase has really slowed down quite a bit – a lot to do with concerns related to input costs.”
Many lenders are seeing the same kind of situation on the farm lending side, but higher input costs could also support a rebound in demand for loans, she mentions.
“Bankers are expecting less support from the government and higher input cost is really driving demand for loans,” she shares. “At the same time, loan performance improved coming out of the pandemic due to higher commodity prices and support from government program payments.”
In addition, farm loan delinquency rates are down with farm loan repayment rates improving substantially, and historically, low interest rates also have supported farm finances and farmland values, she shares.
Looking ahead
“In conclusion, recent ag banker anecdotes have continued to focus on high input costs, supply chain issues and drought,” she shares. “In spite of the fact there has been unprecedented improvements in farm financial conditions.”
In addition, farm balance sheets look to be the strongest in several years as of December 2021 but are expected to not look as strong a year from now due to higher input costs expected for 2022, she shares.
Drought and significant lack of subsoil moisture are still major concerns with the addition of much greater fertilizer cost, she shares, this has left some producers converting corn acres to beans.
“Drought continues to be a significant issue for a large part of the country – both in the north and western part of the U.S., especially with higher feed prices causing cattle producers to reduce cowherds, particularly in Wyoming,” says Cowley. “But snowstorms and recent rain predictions has the potential to alleviate some of these concerns moving into planting season.”
Brittany Gunn is the editor of the Wyoming Livestock Roundup. Send comments to roundup@wylr.net.
