Mapping Stress in Agricultural Lending

Abstract

epayment rates for farm loans have declined every quarter since the second quarter of 2013, suggesting heightened stress in agricultural lending. This stress could be amplified if the outlook for the agricultural sector remains downbeat. Farm income is expected to remain low in the coming years, and farm sector liquidity continues to deteriorate. If lower agricultural commodity prices and farm incomes persist, bankers will need to understand how regional and agricultural economic conditions-such as annual changes in crop revenues, offfarm income, and farm production expenses-affect farm loan repayment rates and contribute to stress in agricultural lending. Declining loan repayment rates may lead to adverse outcomes for both banks and borrowers. When farm borrowers are unable to service short-term debt obligations, their ability to obtain financing decreases. In addition, if stress in agricultural lending intensifies, agricultural banks could become less able to lend to creditworthy farm borrowers. Farming operations require considerable funding to start, function, and grow. Many farmers borrow funds from agricultural banks to purchase land, farm machinery, livestock, and production inputs such as seed, fertilizer, and fuel. Often, these purchases spill over into local, rural economies. Therefore, when repayment rates decline and agricultural lenders are less able to lend to farmers, local economies and the general agricultural sector may experience worse outcomes.

The impact of repayment obligations arising as a by‐product of input use on partial inefficiency: Evidence from Western Australian farm businesses

“…If the achieved revenue is not sufficient to meet repayment obligations, this can have adverse outcomes including eventual potential bankruptcy. Such a severe consequence occurred on a mass scale in the United States in the 1980s when a collapse in land prices and inability to meet repayment obligations resulted in over 200,000 farm foreclosures (Briggeman, Gunderson, & Gloy, 2009; Cowley & Clark, 2016). Episodes of prolonged drought in some regions of Australia and periods of prolonged unexpected high interest rates (Kingwell, 1985) have posed similar threats to Australian farm businesses.…”

Ad hoc government payments impact on non-real estate farm debt

“…That said, non-real estate agricultural loans reached a new high in 2014 ($162.8 billion) and stayed near record levels through 2018, which was $161.1 billion (Cowley, 2018;Kauffman and Clark, 2017). The Kansas City Ag Credit Survey monitor tracks agricultural loans and the data indicates loan repayment rates have been declining and loan extensions increasing since 2013 (Cowley, 2018;Kauffman and Clark, 2017). This suggests producers were having increased difficulty servicing debt.…”

The problem of lending to agricultural enterprises in the context of the COVID-19 pandemic

“…According to [3], effective management of credit operations of a commercial bank requires a balanced credit policy that would provide for the priorities and goals of banking activities, as well as methods and means of their implementation.…”