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2018 Bank outlook: Income is down and lending is up

A report out by the American Bankers Association says lending is up for farming operations and income is falling meaning debt is increasing.

It’s no secret, farmers expect 2018 to be a rough year financially and a new report out by the American Bankers Association agrees. Not only will income be down, but lending is up for farms.

U.S farm banks increased agricultural lending by nearly 6 percent, or $5.9 billion, to $106 billion in 2017, according to the American Bankers Association’s annual Farm Bank Performance Report.

Asset quality remained healthy at the nation’s 1,847 farm banks as non-performing loans fell to a pre-recession level of 0.52 percent of total loans. ABA defines farm banks as banks whose ratio of domestic farm loans to total domestic loans is greater than or equal to the industry average.

“We’re starting to see the effects of a weaker ag sector, but farm banks are still strong and ready to assist their farm and ranch customers,” said Brittany Kleinpaste, vice president, economic policy and research at ABA. “Banks continue to meet the credit needs of both large and small farms, and remain the largest supplier of agricultural credit in the U.S.”

2018 Outlook

Farm sector profitability is forecasted to decline in 2018, as the sector continues to adjust. The USDA is forecasting net farm income in 2018 of $59.5 billion. This is down 6.7 percent from the previous year, and represents the lowest net farm income level in nominal dollar terms since 2006. Net cash farm income in 2018 is forecasted to be $91.9 billion.  This is down 5.1 percent from 2017, and the lowest level since 2009, according to the ABA.

In inflation adjusted dollars, net farm income is forecasted to fall 8.3 percent and net cash farm income to decline by 6.8 percent. The USDA is forecasting that cash receipts for all commodities will fall 0.5 percent in 2018 to $363.1 billion. Annual declines are predicted for both animal/animal product (0.3 percent) and crop (0.8 percent) receipts. Forecast declines in receipts for milk and poultry/eggs are expected to more than offset a forecast increase in meat animal receipts. While in the crop sector, forecast increase in soybean receipts (4.5 percent) will be more than offset by expected declines in receipts for wheat (3.5 percent), corn (4.0 percent), cotton (5.9 percent), fruits/nuts (2.3 percent) and vegetables/melons (7.0 percent).

Direct government farm payments are forecasted by the USDA to decline 18.6 percent to $9.3 billion, reflecting large declines in Agricultural Risk Coverage (ARC) and Price Loss Coverage (PLC) payments. ARC and PLC program payments accounted for nearly 61 percent of total direct government payments in 2017, and are expected to represent 54 percent in 2018.

The USDA is forecasting an increase of one percent in total production expenses in 2018. In inflation-adjusted terms, total production expenses are forecast to remain relatively flat. However, in nominal terms, rising expenses will be driven by the increased expense of fuels/oil (10.2 percent), interest (13.8 percent) and hired labor (2.5 percent). Notably, expenses for inputs that typically are produced by the farm sector itself, including feed, as well as livestock and seed, are expected to decline by 1.3 percent.

The value of farm assets is expected to increase by 1.6 percent in 2018, to $3.1 trillion, as the value of farm real estate is again on the rise. The value of farm real estate assets account for 83.5 percent of 2018 farm sector assets.

The USDA expects farm sector debt to increase to $388.9 billion (1.0 percent) by the end of 2018. Farm sector real estate debt is expected to increase by 1.2 percent to $239.0 billion, while non-real estate farm debt is expected to grow more slowly, rising 0.6 percent, to $150.0 billion.

Back to the banks

More than 96 percent of farm banks were profitable in 2017, with more than 55 percent reporting an increase in earnings.

The Farm Bank Performance Report also provides regional summaries:

  • The Northeast region’s 13 farm banks increased farm loans by 19 percent to $1.2 billion. Ag production loans rose 7.6 percent and farmland loans rose 22.5 percent.
  • The South region’s 192 farm banks increased farm loans by 7.9 percent to $8.3 billion. Ag production loans fell by less than half a percent and farmland loans rose 8.9 percent.
  • The Cornbelt region’s 873 farm banks increased farm loans by 6.6 percent to $46.4 billion. Ag production loans increased 5.9 percent and farmland loans rose 7.2 percent.
  • The Plains region’s 705 farm banks increased farm loans by 5.1 percent to more than $40.3 billion. Ag production loans increased 2.5 percent and farmland loans rose 8.3 percent.
  • The West region’s 64 farm banks increased farm loans by 2.9 percent to $9.8 billion. Ag production loans increased 0.5 percent and farmland loans rose 5.1 percent.

To read the entire banking report, check it out here

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