Banks could be more hesitant to lend to the farm sector just as the agricultural industry is expected to enter a major credit crunch, financial experts say, disproportionately hurting smaller producers in the process.
After two years of near-record profits following the pandemic, a precipitous drop in crop prices is pushing more producers to take out loans, according to a Rabobank report. Although farmers have built up somewhat of a liquidity buffer to manage the downturn, those savings are expected to run out by the next crop year.
"Although the US agricultural sector’s financial affairs are projected to finish 2023/24 in stable condition, the trajectory is downward," the Rabobank report said.
Demand for farm loans is set to climb to levels not seen since 2013 with producers expected to increase their borrowing by tens of billions of dollars over the next several years, according to Rabobank. Farms have largely been able to self-finance operations since 2020 due to increased profits, and producers may face stricter borrowing requirements when they need to take out new loans.
Downturns in the farm economy have led to consolidation in lending, with banks prioritizing other sectors or larger players with bigger loans. This expected downturn is likely to be no different, and banks have already tightened collateral requirements and lending standards.
"For growers, the coming pullback raises the question of which institutions will be most receptive during a time of increased demand," Rabobank said.
Retrenchment among banks will make farms' cash flow and working capital all the more important, Sam Taylor, Rabobank farm inputs analyst, said in a webinar last week.
"As a bank, it's incredibly hard to lend to growers if you've got negative functions," he said.
Shoring up capital, however, can be difficult for farms already facing higher input costs and lower crop prices. And unlike the farm economic downturn in 2012, there's no clear path to profitability for grain growers. Declining biofuel demand and increased competition from Brazil could potentially herald the end of a "low cost commodity model" that has benefited U.S. growers since the end of World War II.
"Some of these other growth outlets, the story on those may be drawing to a close," Owen Wagner, Rabobank senior analyst for grains and oilseeds, said during the webinar. "It's time to start asking ourselves, what do we want to do next in order to ensure that the ag sector is healthy going forward?”
