Farm Debt Split

Lender portfolios differ on where ag real estate and non-real estate debts are held.

Katie Micik Dehlinger
By  Katie Dehlinger , Farm Business Editor
A recent American Farm Bureau Federation Market Intel study finds that commercial banks have greater exposure to non-real estate debt, while Farm Credit system banks have more exposure to real estate, Image by courtesy of AFBF

Farm sector debt hit a record in 2018, coming in at an estimated $409.5 billion, according to USDA. It’s an increase of 4.2%, or $16.4 billion from 2017 levels. Both real estate and non-real estate debt increased to new record highs of $250.9 billion and $158.6 billion respectively.

These trends should come as no surprise. Farmers have increasingly turned to their lenders for financing as cash cushions thinned out after years of low prices and stubborn profit margins. In the days of $8 corn, it wasn’t unheard of for a farmer to buy a tract of land in cash or operate without borrowing from the bank. USDA’s data highlights how that trend has reversed.


There’s another aspect of all this that matters: If farmers’ debt loads are growing, who’s holding that risk?

John Newton, American Farm Bureau Federation’s market intel chief economist, recently dug into data from the Economic Research Service (ERS).

“A lot of folks are thinking about the current financial situation that agriculture finds itself in,” Newton notes. “If we start to see things like asset values decline and bankruptcies increase, who holds that debt becomes a really important question.”

Based on 2017 data, Newton determined that commercial banks and Farm Credit system banks split the overall debt load fairly evenly.

He reports the following percentage of debt load by type of lender: commercial banks, 41.2; Farm Credit system, 40.4; individuals / others, 10.2; life insurance companies, 3.8; FSA, 2.5; and Farmer Mac, 1.6.

Lending from USDA’s Farm Services Agency (FSA) makes up a relatively small piece of the pie. Newton says that most likely only covers the agency’s direct-lending operations. Under FSA’s loan guarantee program, a different lender actually loans the money, but FSA reimburses them if the borrower defaults. Newton says FSA reports about $25 billion in overall farm debt, and the difference between FSA and ERS’s data is that ERS includes guaranteed loans with the lenders that actually service the debt.


While the overall debt load splits fairly evenly, the allocation of that debt shows a different pattern. The Farm Credit system holds more real estate debt, about $108 billion worth, compared to commercial lenders, which hold about $89 billion worth.

For non-real estate debt, which includes things like operating and equipment loans, commercial lenders are the largest creditors, accounting for nearly half of all non-real estate debt, at $73 billion. Farm Credit banks, on the other hand, only hold $51 billion in non-real estate debt, or about 33% of the marketplace. The third largest creditor in this category is individuals, who hold about $26.5 billion, or 17%.

Newton says this was the most interesting finding of his study.

“You think about where a lot of the investment and increase in farm debt has been over the last decade, it’s been in real estate debt. It’s this interest and influx of investment into real estate that I think has helped keep land values relatively stable even though commodity prices have fallen. When land does become available, people are out there trying to get it. There’s not a lot of transactions in agricultural land to begin with, so it holds its value. It would be a less-risky investment.”

Newton calculates that 45% of the portfolio of commercial banks is composed of non-real estate debt compared to 32% of Farm Credit system banks. Because of the fundamental differences between these two types of debt (particularly interest rates and term length), commercial banks appear to have greater exposure to the success or decline of the farm economy.

It’s worth noting that every commercial bank is different. Each has a different portfolio mix, not just of real estate versus non-real estate debt. Some have greater exposure to different sectors of agriculture or different sectors of the economy all together. But, if economic stress in the agriculture sector continues or worsens during the next year or two, commercial banks have the most exposure.


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