Ag Lenders:
Cultivate Growth with Effective Pricing, Structure By Mary Ellen Biery, Abrigo
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he coronavirus pandemic created turbulent conditions in ag lending in 2020, so understanding credit risk in current ag loan portfolios and effective pricing will be keys to solid returns for ag lenders in 2021. Ag lending conditions improved in the third quarter as loan repayment rates and farm income stabilized with help from government programs and rising commodity prices. However, despite rising sentiment among farmers and some ag lenders, the highly uncertain outlook for the U.S. economy and agriculture finance warrants caution in agricultural lending activities. “There’s still going to be good strong customers out there that have solid collateral to back their loans,” said Abrigo Senior Advisor Rob Newberry. “Lenders will need to identify their ‘good’ customers from their ‘bad’ customers and not chase loan opportunities they shouldn’t just because they have excess liquidity to lend.” Lenders can make good loans for farm production and ag real estate despite the uncertainty related to the coronavirus pandemic, Newberry said. His top advice? “Make sure you understand the cash flow and make sure you are pricing for the risk you’re taking.” Employing technology built for ag lenders can make assessing and monitoring creditworthiness of farm producers easier and more efficient. Ag loan pricing technology can also make decisions more subjective, ensuring that institution objectives are met while meeting borrower needs where possible.
How farmers have fared in 2020
The impact of the coronavirus pandemic on farmers in 2020 has been multifaceted, Newberry said. Among family farms (which make up 98% of all
2 million U.S. farms), nearly half of principal operators and spouses rely on a job off the farm to supplement low or negative farm income. But with numerous off-the-farm businesses closed due to COVID-19-related shutdowns, farmers and their family members lost important secondary sources of income for repaying loans. In 2021, Newberry said, a major question will be whether off-the-farm wages continue to support farm debt service coverage. In addition, farmers have faced major disruptions to their distribution channels, and with rising COVID-19 numbers in many parts of the U.S., it’s unclear whether those disruptions will be repeated in the months ahead. “When folks get sick at the meatpacking plant, they have to shut it down, and that backs everything up,” Newberry said. Earlier this year, beef and pork processing plants couldn’t process as many animals as planned due to employee illnesses and related plant closings, so farmers had nowhere to sell their cattle and pigs. That created an oversupply at a time consumers were also struggling to get out to stores safely, which hurt demand. With just-in-time processing at play, the whole supply chain for meat producers got backed up. Newberry noted that many producers got creative after the pandemic began, finding new ways to sell directly to consumers. New distribution channels and other learnings from 2020 should help in the event of future potential supply-chain disruptions.
Recently improved ag outlook
While still lower than a year earlier, farm income in the third quarter improved from the second quarter, according to the latest Federal Reserve District Ag Credit Survey.
March-April 2021 •
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