Season 2 | Ep. 42: US Agriculture: 2024 Industry Risk Analysis (Part Two)

In this episode of the Risk Intel podcast, host of the show and SRA Watchtower’s CEO, Edward Vincent, welcomed Amitabh Bhargava, Senior Managing Director of Credit Portfolio Management for SRA Risk Consulting back to the show to continue the conversation from last week on the recent U.S. Department of Agriculture’s (USDA) 2024 Farm Sector survey released in September 2024. The two discussed the implications for risk management in the agricultural sector, diving deeper into credit risk, how climate change can impact farm and Aglending, and also discussed non-credit risks to incorporate into your overall ERM program.

In this episode Amitabh goes over data from the recently released White Paper: 2024 Agriculture Industry Risk Analysis, which can be downloaded for free here. If you missed part 1 of this episode, click here.

Key Data Points from the USDA Survey Report

Amitabh provided an in-depth analysis of the USDA's forecast, highlighting trends from 2015 to 2024. It is worth noting, 2015-2019 is considered the “normalized average” of the banking industry. While most will look at year-over-year differences, because of COVID and the many economical anomalies that have occurred over the past few years, it’s important to compare to 2015-19 range as well as year-over-year.

Net Cash Income

Amitabh starts his discussion talking about net cash income. Net cash income rose sharply in 2021–2022 due to government payments and higher commodity prices, but has since moderated, with 2024 still 19% higher than the 2015-2019 average. If you look at it year-over-year, it would look like it’s decreasing, but it’s very important to note the 19% increase from 2019. While Net Cash Income is decreasing and coming back down to a more normalized range, net cash income is still strong.

Government Payments

Government Payments are another important aspect to look at when lending to farms. They peaked during COVID-19, now down by 41% compared to pre-pandemic levels (2015-2019). These government payments have decreased drastically, the decrease may cause more farms to be interested in loans to supplement the drop in income from these payments. Banks servicing loans of farms heavily reliant on Government payments should track this as a risk due to the downward trend.

Production Expenses

Production expenses have obviously increased the last few years, partially due to the inflation increasing over the last two years. These product expenses include things like fertilizer prices, feed prices, gas for tractors, etc. They increased by 6% in 2022, 8% in 2023, and now stand at 5% higher than pre-COVID averages. This could be another driver of loan requests as farmers now have to pay more to create the same amount of product.

Exchange Rates and Exporting

Agricultural imports in the US have been steadily rising the past few years, while exports have been declining. However, ag exports are still up 22% compared to the pre-pandemic era. They have simply moderated compared to the agricultural boom that occurred in 2020.

Risk Management Implications for Lenders

Lenders in the agricultural sector must prepare for rising demands in loan restructuring and refinancing as farmers face declining net cash income. Amitabh noted that while farmland values have remained strong, liquidity risks could intensify, particularly for banks with heavy exposure to agricultural loans. He emphasized the importance of diversification, both in crop-livestock portfolios and geographic regions, as well as monitoring farmers’ reliance on declining government support. Diversification is key to mitigate risk, especially for banks focused on agriculture. Some farms that produce mainly livestock, poultry or eggs have been doing very well. Those product prices have been remaining stable or increasing. However, crop prices have dropped compared to the 2020 boom.

“a diversification in terms of the portfolio of loans of borrowers specializing in these makes sense.”

Climate Change and Non-Credit Risks

The conversation also touched on the increasing risks posed by climate change. Drought conditions affect 30% of the U.S. agricultural landscape in 2024, threatening yields and farm income. Amitabh highlighted the need for lenders to assess their clients' climate risk exposure and adapt their lending strategies accordingly.

Additionally, banks should be aware of reputational risks tied to sustainability and consumer demand for ethically produced goods. Non-credit risks, such as market price fluctuations, geopolitical trade disruptions, and liquidity challenges, should also be factored into a banks overall enterprise risk management strategy. Tracking each credit and non-credit risk in a streamlined ERM software is recommended to creating a holistic picture of a banks risk profile.

Conclusion: A Resilient but Challenged Sector

As Amitabh summarized, the agricultural sector stands at a crossroads in 2024. However, with innovative practices like precision farming and automation, it remains resilient and poised to navigate the evolving landscape. For financial institutions, a comprehensive, forward-looking risk management approach is crucial to managing the complexities and ensuring long-term stability in this dynamic sector.

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.

‍