Lending an ear: How a downturn will influence US agricultural borrowing and lending

Cycles of reward and stress are a familiar aspect of farm financials and persist over time. Generous support during the pandemic and a post-pandemic price surge greatly bolstered US growers’ balance sheets, lending a level of financial resilience to the agricultural sector not seen since the previous margin spike in 2011/12. While farmers used this as an opportunity to acquire new assets and pay down debt, many also found themselves in a position to self-finance and reduce their reliance on banks for operating capital.

As discussed in recent RaboResearch publications, Tightening the Corn Belt and Balancing act, the downturn in the cycle is now upon us, with former pillars of support – macroeconomic conditions, sector fundamentals, policy, and managed money – all now becoming liabilities for the US agricultural economy. In this paper, we begin with a farm financial dashboard, assessing sector-wide strength or vulnerability using metrics of liquidity, profitability, efficiency, and solvency. While each measure tells its own story, a common thread is that although the US agricultural sector’s financial affairs are projected to finish 2023/24 in stable condition, the trajectory is downward. Furthermore, as strongly as the farming industry was positioned when commodity prices reached their peaks in the 2021/22 crop year, this still fell short, by some measures, of the prior peak of financial resilience achieved in 2011/12 – its own precursor to a multiyear wave of challenges in the farm economy.

To assess the state of affairs going forward, we introduce the RaboResearch Farming Baseline model. The model reflects the financial state of a midsize, Midwestern grain operation that rents the majority of land instead of owning it. Such operations are positioned to reap both the rewards and risks of farming and serve as an effective bellwether for the sector’s financial health. In this model operation, we observe strong margins from 2020/21 to 2022/23, followed by negative margins and a declining cash balance through 2025/26.

The outlook points to a grain and oilseed farming sector that is projected to remain financially stable through the end of the current 2023/24 crop year. Although borrowing for capital expenditures remains subdued, the demand for operating lines of credit will register its largest uptick since 2013. Just as growers’ financial needs are on the rise, lenders’ collateral requirements and lending standards are tightening. While this is a logical response as banks seek to manage risk, among commercial banks, periods of retrenchment have seemingly translated into permanent, downward step changes in sector participation. The 2024/25 season will see further deterioration in the farm sector, begging the question of which banks will stick with the sector, particularly its small to midsize operators, as times get lean.