Agricultural Lending Faces Growing Problems

In 1984, Japanese toy company Takara Tomy introduced a line of plastic toys that could transform from cars and vehicles into robots. Known as Transformers, the shapeshifting toys were so popular that they spurred the creation of a comic series, television programs, and blockbuster Hollywood films that remain popular to this day.Unfortunately, a dramatic change in the way something looks isn’t always a good thing. In late 2023, farmers had what they believed was adequate capital to see them through a couple years’ worth of falling commodity prices. By early 2024, however, it was clear that the working capital many farmers had on hand was insufficient — a reality that the banking industry is starting to grapple with.Cash Flow ChallengeDeclining commodity prices are never good for the agricultural community, but add in inflation and rising costs and it could mean the end for farmers who have already been struggling financially. Faced with lower profit margins, many farmers have burned through their cash reserves quicker than anticipated and are looking for loans to provide lifelines. According to data from the Center for Farm Financial Management at the University of Minnesota, crop farmers in Minnesota experienced a 75% drop in net income in 2023 compared to the previous year. As a result, short-term bank loans to farmers have risen more than 40% since 2024 — the fastest rate since 2017, according to data from the Survey of Terms of Lending to Farmers, driven largely by large loans originated at small and mid-sized financial institutions. Loans for $1MM or more comprised the majority of agricultural lending volume for the first time in more than 20 years. While increased loan demand is a good thing for the banking community, community financial institutions (CFIs) need to be cautious regarding the risks involved with such loans. Ongoing fluctuations among commodity prices, farmers’ existing debt levels with elevated interest rates, and even the possibility of mass deportations could all mean ongoing financial struggles for farmers. Amid heightened costs, farmers are expected to earn $6.5B (4.4%) less net income in 2024 compared to 2023, according to estimates from the U.S. Department of Agriculture. As farmers struggle with declining working capital, many may be forced to put up their land as collateral to acquire loans. Because of this, the possibility of bankruptcies and foreclosures increases, particularly those with high leverage experience cash flow shortages.The Rising Need for LoansProblems within the agricultural industry are not uniform. While crop farmers are struggling with the lower cost of commodities, the lower prices are actually proving beneficial for livestock farmers who are able to spend less on feeding cattle. Geography can often be a factor, and bankers say they are already starting to see foreclosures and bankruptcies occurring in the Southeast, where farmers forced to apply for longer-term debt have had to put up land as collateral. One hope for the agricultural industry is the passage of a new Farm Bill, which includes provisions that could help farmers such as loan guarantees and assistance pegged to the price of commodities. However, it is still too early to know how things will play out with the new administration.In the meantime, CFIs with active agricultural loan portfolios should be proactive in their efforts to assist borrowers by working with them to identify their needs and advising them on ways that they can reduce risks and better manage any capital they still have on hand. The following are some ways that CFIs can provide assistance to their agricultural loan borrowers:

As the agricultural community faces lower profit margins and difficult market conditions, the banking industry is preparing for a boost in loan demand that could carry significant risks. CFIs should actively work to assess the needs of borrowers within this demographic and take steps to help these customers identify ways that they can better weather the storm.