The Impact of COVID-19 on Ag Lending


Everyone has been impacted by the COVID-19 pandemic in some way or another, and the agricultural industry is no different. This paper outlines three areas of impact from COVID-19 that lenders to the ag industry will want to continue to evaluate in 2021: farm income, loan demand and credit risk.

Farm Income
Even though there were disruptions in the processing and distribution channels early on during the pandemic, 2020 farm net income results remained higher than many experts predicted, according to the latest data from the U.S. Department of Agriculture (USDA). In fact, net farm income is forecast to have increased 43% to $119.6 billion in 2020 — its highest level in about seven years. The questions that ag lenders should be asking as they approach the next lending season are:

  • What has been driving these results
  • Can they be sustained going into 2021 and beyond?

Taking a deeper look at what made up the increase in net income, two specific COVID-19 impacts can be identified. The first was the increase in government payments to farmers in 2020.

Direct government payments are projected to have increased by more than $20 billion in 2020. That is twice the amount of direct government payments made in 2019. The increase can be tied directly to the Coronavirus Food Assistance Program and the Paycheck Protection Program.

Congress recently approved another round of relief that included $13 billion targeted specifically toward agriculture, and new funding for the Paycheck Protection Program. However, it’s unclear how much will end up directly in farmers’ pockets in 2021.

Other influences on net income in 2020: lower prices for livestock and lower quantities produced for crops caused by dry conditions, and the derecho that impacted a large portion of the Midwest in 2020.

Actual cash receipts for crops and livestock sales are expected to have declined by $3.2 billion (0.9%) to $134.1 billion in 2020, according to the USDA forecast. The chart below shows cash receipts for the different agricultural verticals.

The second major COVID-19 impact on increased farm income has been lower interest rate expenses. The USDA predicts that interest expenses will have declined nearly 26% to $15.3 billion in 2020. The graph of the 3-year Treasury rate illustrates the impact that COVID-19 has had on interest rates, as does the snapshot view from April 24, 2020. It shows the 3-year Treasury at 0.26% — an 88% decline from a year earlier, when it was 2.29%. Fed policymakers have signaled they expect no hikes in the federal funds rate through at least 2023, based on their median forecast.

Other major production expenses for agriculture, such as fertilizer and feeding costs, are forecast to have remained relatively unchanged or to have slightly increased in 2020.

One risk to farm income that bears watching is the risk of losing off-the-farm wages that historically help support farming activities. Historically, most farm households report a loss from their farming operations and rely on off-farm income sources for both on-farm and off-farm needs. Off-farm wages and benefits are generally more stable and supplement farming income to make ends meet. The pandemic has increased the risk of losing off-the-farm wages or employment-based health insurance benefits. Off-farm income sources vary by household. The majority (61%) comes from wages and salaries of operators and other household members.

Agriculture Loan Demand
Demand for loans to agriculture is a second trend worth monitoring and assessing in 2021 for pandemic-related impacts. The latest data provided by the Federal Reserve shows a significant decline in ag loan demand. At the same time, with banks flush with cash, the availability of funds for ag lending increased in 2020.

What is causing the lack of demand for ag loans? Remember the $20 billion of direct government payments to farmers pumped into the ag economy by COVID-19 programs? These funds reduced the need for many farmers to get operating lines of credit or loans in 2020. In fact, several ag producers have been able to pay back outstanding debt in 2020. According to Q3 2020 Call Report data, the recent decrease in loan volume was driven by non-real estate loans. Ag production loans, down nearly 5% from a year earlier, fell the most in more than 15 years. Combined, the pullback in ag production and non-real estate loans led to the largest quarterly decline in overall farm debt since the late 1980s.

Agricultural banks experienced the steepest declines in loan balances. Ag banks are defined as banks with total assets under $500 million with at least 15% of the loan portfolio in ag production or ag real estate loans. These banks represent many of the community banks located in smaller rural towns that specialize in ag lending.

Third-quarter total farm debt at all ag banks decreased by more than 8% from a year earlier, and over two-thirds of the decline was at agricultural banks with less than $200 million in total assets.

Credit Quality
Given some of the issues mentioned above, lenders will want to keep a close eye on ag loan credit quality and COVID-19’s continuing impact on the ag industry. One of the major ratios used to assess credit risk in ag lending is debt service coverage. As discussed earlier, total cash receipts were down in 2020, but net income increased due to direct government payments. COVID-19 also could have negative impacts on off-the-farm wages that are used to supplement farm income and living expense. When reviewing 2020 financials and calculating some of the key ratios used in underwriting individual loans, ag lenders will want to analyze how much of the direct government payments should be used and any impact of trends related to off-the-farm wages.

In addition, lenders should monitor the credit quality of the remaining loans in the ag portfolio. Farmers that used all the direct government payments to sustain current operations in 2020 and did not pay off any additional debt might raise concerns about their ability to service their debt once the government programs end. While non-performing farm loans for ag banks are performing better than non-ag banks, they are still at the highest level in 20 years. This is something ag lenders will need to keep an eye on in 2021 and going forward.

In summary, COVID-19 has had a significant impact on ag lending in 2020. Farm debt declined in the third quarter at commercial banks due to the government funds that were pumped into the agriculture economy as part of the CARES Act. While this was critical to secure the food supply during the pandemic, it will have long-term impacts to ag lending. Lower interest rates for the foreseeable future should help farm net income, but the reliance on direct government payments is a short-term solution. The reliance on off-the-farm wages and benefits will still be critical going forward.

Some credit quality issues have been delayed with some of the government programs. With excess funding available and low loan demand, ag lenders might be tempted to chase after deals. To avoid risky or unprofitable deals while growing the ag loan portfolio, lenders will need to make sure they are diligent in understanding the credit risk and utilizing farm loan pricing that meets institution objectives while satisfying ag borrower needs where possible.

About the Expert
Rob Newberry is Senior Advisor with Abrigo’s Advisory Services and a faculty member of the Graduate School of Banking at the University of Wisconsin-Madison. In the past 10 years, he has worked with financial institution leaders and regulators to develop a suite of credit administration tools for community banks and credit unions. Prior to Abrigo, Rob spent 15 years at Wells Fargo & Co., holding strategic and leadership roles in such areas as business intelligence and delivery innovation. His MBA is from the University of Iowa.