ABA survey: Ag lenders cite interest rate volatility as top concern

Agricultural lenders are primarily concerned with interest rate volatility in the coming year, based on the 2022 Agricultural Lender Survey by ABA and Farmer Mac. Forty-nine percent ranked interest rate volatility among their top two concerns, up 35.5 percentage points from last year. Rising rates helped bolster bank net interest margins, but a combination of higher funding costs, fears of weakening loan demand and strong competition is expected to cut into rising yields, according to today’s report released at ABA’s Agricultural Bankers Conference in Omaha, Nebraska.

Lenders said inflationary pressure is their top concern for producers. Liquidity and farm income, two of the top two concerns in prior years, were the second- and third-greatest concerns, respectively, in 2022. Lenders remain comparatively more concerned about weather and less concerned about total leverage than in prior survey years. Recession risk, a new category this year, was lenders’ fifth-highest ranked concern for producers. By comparison, lenders ranked “a slowing economic recovery” near the bottom of their list of concerns for producers in 2021.

For the second consecutive year, most ag lenders (66.3%) reported overall farm profitability increased, while one in ten reported profitability decline. Lenders expect conditions to deteriorate in 2023, with 52.6% projecting a decline in farm profitability—still well below the 2016-2020 survey average of 82.3%. Approximately four out of five ag lenders reported rising land values in 2022, consistent with last year. A growing percentage of lenders expected land values to slow down (59.4%) or decline (12.7%).

Top concerns after interest rate volatility were lender competition and weak ag loan demand. Approximately one in three respondents ranked competition among their top two concerns, down 17 points from last year. Nearly 80% ranked the Farm Credit System as their primary competitor for agricultural loans. Demand for loans secured by farmland increased in 2022 at about the same pace as in 2021. Demand for agricultural production loans also grew in 2022, reversing the downward trend reported last year. However, demand for ag production loans remains below the 2016-2018 survey average. Respondents anticipate that loan demand for both categories will continue to increase over the next 12 months.