The Next Cliff on Minds of Ag Bankers

OMAHA (DTN) -- Spoiler alert: Higher commodity prices are doing a lot of good right now.

But how well will those strong commodity prices carry farm incomes into 2023 and beyond remains a question for bankers gathered in Omaha for the American Bankers Association's Agricultural Bankers Conference.

Economists from the Center for Farm Financial Management at the University of Minnesota helped lead an analysis of whether high prices equal high profits. The center tracks farm profitability using a database of nearly 3,500 farms, dubbed Finpack.

On higher prices helping farm income, "Spoiler alert, it doesn't hurt," said Dale Nordquist, an economist from the center. "Good prices are doing a lot of good right now."

Using Finpack data to model some risks to producers, lower commodity prices, higher input costs and 2% higher interest rates in 2023 can shift a lot more producers into negative income territory. A few areas, such as hog production, still look profitable. Other commodities, such as dairy, are more at risk. A $2 per cwt shift in milk price can make a dramatic difference in income potential for dairy producers.

"It's very sensitive for these operations running into high feed costs," Nordquist said.

Some key points from Sunday's opening seminar:

1. AN INCOME CLIFF COMING?

After two years of strong farm profitability, will farm income in 2023 go off a cliff?

"We're going to see a decline at some point," said Pauline Van Nurden, an economist with the Center for Farm Financial Management.

The comparison now is whether 2022 compares to 2012. In 2013, farm income and commodity prices went off a cliff, leading to a stretch of low-income years that carried on through 2019.

Economists state that in this kind of environment, more loans historically start becoming delinquent in 20 to 36 months. That's looking ahead to the 2024-25 crop year that could put a squeeze on profitability.

2. INPUT COSTS AND INTEREST RATES

Higher fertilizer and fuel costs have been the driving factor for higher farm expenses the past two years, but higher interest rates will come into play. The pace of interest rate increases is the highest in the past 30 years.

"So, this is a very different environment than we are all used to working in," said Jackson Takach, chief economist at FarmerMac.

Basis points for real estate loans are 400 higher (4% higher interest on a loan). For agricultural loans, basis points are up 350 points (3.5% interest on a loan).

3. LOWER GOVERNMENT REVENUE

Federal aid was a major buoy for farmers in 2020 and 2021, but those government payments are winding down this year.

David Kohl, professor emeritus at Virginia Tech University, is a renowned economics lecturer. He said farmers and agricultural bankers have become complacent that federal aid will come to their relief. "That kind of mindset is not sustainable," Kohl said.

He's not certain the high levels of government aid from 2018-2020 will be there again.

"Can you hit the black (profitability) without government?" Kohl asked.

Kohl said he expects interest rates to continue to rise "for an extended period." He also is concerned about how a strong dollar could inhibit exports.

The concern is whether those higher costs will start to cross with lower revenue as well.

"It's not just rising expense levels, it's a descending revenue level that will create that dual threat," Takach said.

Kohl said there are already some farmers relying heavily on credit card debt. Other nontraditional lenders are picking up more younger, leveraged agricultural borrowers.

While some producers will struggle, staring at tighter credit conditions, Kohl reminded bankers that other customers will adjust.

"You are going to have a certain group of producers who are going to do very well," Kohl said.

4. HOW TO PREPARE FOR A CLIFF

The economists at the University of Minnesota's Center for Financial Management recommend:

-- Fine tune risk management; know your costs of production.

-- Stick with your marketing plans.

-- Use revenue-protection crop insurance to help with marketing strategy.

-- Input purchases and marketing plans should work together.

Chris Clayton can be reached at Chris.Clayton@dtn.com

Follow him on Twitter @ChrisClaytonDTN

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