Season 2 | Ep. 41: US Agriculture: 2024 Industry Risk Analysis

The U.S. agricultural sector is facing a challenging transition. Following a period of record profitability in 2021 and 2022, the latest USDA 2024 Farm Sector Income Forecast projects a continuing decline in farm income. According to Amitabh Bhargava, a seasoned expert in credit risk and portfolio risk management, farm incomes dropped nearly 29% in 2023 and are expected to fall another 9-10% in 2024. This decline represents a slowing of the income reduction but signals continued financial stress for farmers across the nation.

The driving forces behind this economic shift are varied. While some of the pressures from inflation and rising input costs have eased, new challenges—particularly commodity price drops—are weighing heavily on the agricultural economy. This mix of declining profits and sustained operational costs has put significant pressure on farm finances, and, by extension, the institutions that lend to them. While overall credit risk metrics remain stable, banks and other financial institutions should be prepared for growing risks as the sector weathers this downturn.

Listen to the full podcast episode below where host Ed Vincent asks Amitabh to highlight some of the key trends from the recent US Agriculture survey data released in September of 2024. For those interested, Amitabh has written a white paper, "2024 Agriculture Industry Risk Analysis," which dives deeper into the data - Scroll below to download the white paper today!

What Lenders Should Know About the Agricultural Sector

Farm and Agriculture lenders must take a holistic view of the agricultural sector’s financial challenges, which include a combination of declining farm income, fluctuating commodity prices, and moderating, but still high, input costs. Amitabh outlines several key factors that financial institutions should consider when assessing risk in the agricultural sector:

Key Inputs to Monitor

1. Commodity Prices: Farmers in the crop sector, particularly those focused on corn and soybeans, are dealing with declining commodity prices. Amitabh explains that lower crop prices are compressing margins, making it more difficult for these farmers to meet their loan obligations. On the other hand, sectors like livestock, poultry, and dairy have experienced more stable or rising prices, creating a divide in performance across agricultural subsectors. For lenders, this means portfolio diversification will be crucial for managing exposure to agricultural loans.
2. Rising Input Costs: While the pace of inflation has slowed, input costs such as labor, fertilizer, and fuel remain elevated. Labor costs are particularly important, especially given the heavy investments many farms have made in technology and equipment to reduce reliance on manual labor. However, as Amitabh points out, investing in new technology requires capital, and with high interest rates, borrowing to make such investments becomes more challenging. For lenders, understanding a farmer’s operational efficiency and cost management practices will be critical for assessing credit risk.
3. Interest Rates: High interest rates are making it difficult for farms to borrow money for expansion or capital investments in technology. For lenders, this means that while loan demand may rise due to operational cash flow challenges, farmers are unlikely to take on new debt for growth, potentially limiting profitability in the near future.
4. Balance Sheets: Despite the ongoing profitability challenges, many farmers entered this period with strong balance sheets, thanks to two consecutive years of record earnings and rising farmland values. Farmland values have been rising steadily, providing a solid asset base for many farmers. However, Amitabh emphasizes that farmland values are highly localized, and certain areas—like Texas—continue to see significant growth, while others are only experiencing modest increases. For lenders, understanding the local dynamics of farmland values and monitoring for any slowdown in price appreciation will be essential for assessing the long-term solvency of borrowers.

"Banks should anticipate some higher demand for refinancing or loan restructurings if farmers are going to struggle with cash flow challenges"

Farmers who enjoyed the benefits of rising land values and strong profitability in recent years may still have strong balance sheets in 2024. But, as Amitabh warns, this strength can quickly deteriorate if farmland values moderate or begin to fall, especially as many farmers face tightening margins and higher operational costs. Financial institutions should closely monitor not only their borrowers' income statements but also the health of their balance sheets as the year progresses.

Importing vs. Exporting: The Impact of Global Trade on U.S. Agriculture

A crucial factor influencing the U.S. agricultural sector is the global trade environment, especially the dynamics between imports, exports, and currency fluctuations. The U.S. agricultural sector has long been a major exporter, shipping products such as soybeans and corn to international markets. However, recent global trends are creating new pressures for U.S. farmers.

Export Challenges

The strength of the U.S. dollar is a double-edged sword for the agricultural sector. As Amitabh points out, the dollar has strengthened significantly in recent years, which has made U.S. agricultural exports more expensive for foreign buyers. This has led to a reduction in demand for key U.S. exports, particularly crops such as soybeans, which are used primarily for animal feed. When U.S. crops are priced higher in global markets due to a strong dollar, competing countries like Brazil, whose currency has not appreciated as much, become more attractive sources of agricultural products.

This imbalance is putting additional strain on U.S. farmers who rely on export markets to sell their goods. For lenders, understanding how global trade dynamics affect the income and profitability of their borrowers is crucial, as a shrinking export market could exacerbate the financial stress many farmers are already facing.

Rising Imports

On the flip side, U.S. imports of agricultural products, particularly horticultural goods like vegetables, are increasing. Amitabh notes that this growth is driven in part by changing consumer preferences, which have increased demand for fresh produce. As imports grow and U.S. exports face increasing competition, the agricultural trade balance is becoming more unfavorable.

For financial institutions, the trade environment introduces another layer of complexity when assessing risk. The ability to sell agricultural products abroad is essential for many U.S. farmers, and any further strengthening of the U.S. dollar or shifts in trade policy could worsen the current situation. Lenders should be aware of how these macroeconomic factors may influence the financial health of their clients, particularly those heavily dependent on exports.

Conclusion

The U.S. agricultural sector is at a critical juncture, and financial institutions that lend to this industry must navigate a complex array of challenges. From declining farm incomes and fluctuating input costs to the shifting dynamics of global trade, the road ahead is uncertain. As Amitabh notes, strong balance sheets may provide a buffer in the short term, but financial stress is on the rise. Lenders should focus on understanding the operational efficiencies, cost management practices, and local real estate conditions affecting their borrowers, while keeping a close eye on global trade and macroeconomic trends.

Stay tuned for Part Two to be released next week - in the meantime download the free white paper below!

White Paper: 2024 Agriculture Industry Risk Analysis

‍For a more detailed analysis of these trends and their impact on risk management, download the full white paper authored by Amitabh Bhargava.

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