Episode 21: Expert Analysis of Resilience and Risks in Agricultural Lending

In this episode of the SRA Risk Intel podcast, industry experts Peery Heldreth and Amitabh Bhargava shared their insights into agricultural lending and the current state of the US agricultural and farming sector. If you're short on time and can't listen to the full episode, we've summarized the essential takeaways and valuable insights from this informative discussion.

Size and Significance of the Agricultural Sector

Amitabh Bhargava starts the conversation by providing a compelling overview of the agricultural sector's immense size and importance. With an estimated gross revenue of approximately $500 Bn, the farm sector plays a pivotal role in bolstering the U.S. economy.  GDP contribution of Ag and Ag related sectors is as high as $1.3-$1.5 Trillion.

The discussion then shifts to agricultural lending, a critical aspect of the agricultural sector. Bhargava explains that agricultural lending encompasses real estate and production-related loans, totaling just over $500 billion. Various financial institutions, including commercial banks and the Farm Credit System, facilitate these loans, ensuring the sector's continued growth and stability.

The Farm Credit System's Role

Peery Heldreth, former President and CEO at Farm Credit of the Virginias underscores the paramount importance of the Farm Credit System, established by Congress in 1916. This institution's mission is to support agricultural lending and rural communities, ensuring access to capital for farmers and maintaining a stable food supply—a mission as critical today as it was over a century ago.

Trends and Challenges in the Agricultural Sector

Amitabh Bhargava who recently published a white paper on Agriculture Risks, delves into recent trends and challenges facing the agricultural sector. Despite initial pandemic-related obstacles, the sector experienced positive cash flow due to supply chain disruptions and surging commodity prices. Low-interest rates further bolstered the valuation of farmland. However, Bhargava cautions about potential risks, including commodity price fluctuations, sequential decline in government payments, and geopolitical issues that may impact the sector in the coming years.

Four out of ten respondents (39%) said they expect farmland values to rise over the next year while 13% said they look for values to decline in the next year.

Managing Risks in Agricultural Lending

The conversation shifts to risk management in agricultural lending, with Peery Heldreth sharing best practices. He emphasizes the importance of relationship management. Lenders should be prepared to have discussions around risk mitigation like crop insurance and forward contracting, diversification which could include custom farming, and good financial recordkeeping. Lenders must also adapt to changing dynamics across regions and commodities, prepare for industry consolidation, and continue to make decisions based on the five C's of Credit.

Evaluating Borrower Health

Amitabh also provides insights into evaluating the health of borrowers in the agricultural sector. Factors such as asset value, net operating income (NOI), cash flows, and global influences like climate change are crucial considerations for lenders.

Preparing for Potential Challenges

The episode concludes with a focus on preparing for potential challenges, while Peery stresses the importance of having systems in place to identify, monitor, and manage risks. This includes understanding risk appetite, developing action plans for various scenarios, and ensuring timely access to data and robust reporting.

In Summary

US agriculture is facing a variety of headwinds in 2023-24 after experiencing three years of strong profitability over 2020-22. Strong growth in income and assets resulted in non-current rates on both farmland loans and Ag production loans for Commercial Banks reaching close to all-time low levels. However, in the latest Ag Credit surveys conducted by regional Federal Reserve offices, farm loan repayment rates have declined close to long term averages after scaling all time highs in late 21-early 2022.

This Risk Intel Podcast episode offers a deep dive into the agricultural sector's significance, recent trends, and the critical role of risk management in agricultural lending. The insights shared by Peery Heldreth and Amitabh Bhargava offer valuable guidance for industry professionals navigating the dynamic landscape of agriculture. Stay informed, stay resilient, and stay prepared for the challenges and opportunities in this vital sector.