Agriculture banks say loan demand is poised to rise through 2023, though unlike other corners of the economy, farmers tend to borrow more when their finances and growth prospects are under pressure.
They tap credit lines to bolster cash positions in the face of weaker profit prospects and to cover higher expenses in
Commodity prices spiked last year after Russia's invasion of Ukraine sparked global fears of food and fuel shortages. This trend propelled farm income to record levels in 2022, according to U.S. Department of Agriculture estimates.
But crop prices since then have come down and been volatile early in 2023, leading the USDA to forecast that farm sector profits this year will drop 21% from 2022 to $150.5 billion. Meanwhile, fertilizer and agriculture equipment costs remain elevated — owing to pandemic fallout and lingering supply-chain snarls — and the cost to rent farmland also is holding at historically high levels. All of this has farmers turning to their lenders to help bridge the divide.
Community 1st Credit Union in Ottumwa, Iowa, anticipates a near-term slump in the farm economy.
"Our sense is farmers are a little pessimistic for 2023," said Gregory Hanshaw, CEO of the $939 million-asset credit union. This could translate into credit demand and, for Community 1st, single-digit agriculture loan growth this year.
Purdue University's
"Rising interest rates and weaker prices for key commodities including wheat, corn and soybeans from mid-February through mid-March were key factors behind this month's lower sentiment reading," said James Mintert, Purdue's Center for Commercial Agriculture.
Indeed, while farmers may need to borrow more, he said, they are worried about their ability to absorb the burden of higher interest rates on new loans. The Federal Reserve has
Shan Hanes, president and CEO of the $139 million-asset Heartland Tri-State Bank in Elkhart, Kansas, said he also expects loan demand to increase across much of the farm belt. But high rates and pockets of severe drought, including much of Kansas, may make it difficult for an increasing number of farmers to afford to take on new debt this year. This could keep overall loan growth in check, he said.
What's more, Hanes said, small towns throughout the central and Western U.S. depend upon farm owners spending their profits at local businesses and fueling regional economies. With pullbacks in that spending, small businesses could suffer and
"It's kind of doomy and gloomy out there," Hanes said.
Creighton University's
"Bankers were pessimistic regarding the economic outlook, with downward pressure on retail sales for the first quarter of 2023," said Creighton economist Ernie Goss. Confidence among lenders, he added, "has fallen to levels indicating a very negative outlook."
What's more, analyst Dan Kowalski of CoBank, a member of the Farm Credit System, said turmoil in the commercial banking sector over the past month has created a new and unpredictable variable in the broader U.S. economic outlook.
For now, he said, the failures of Silicon Valley Bank in California and Signature Bank in New York appear contained and the economic impacts modest. But he said bankers are bound to toughen lending standards and reduce credit availability, affecting small businesses — including farms — and the consumers they serve. "That will create a downdraft in the economy in the coming months," Kowalski said.
