The American Bankers Association held its annual Agricultural Bankers Conference in Minneapolis last week, and they had a lot to discuss. Jackson Takach, the chief economist for Farmer Mac, said they had a lot of ground to cover. One topic of conversation was interest rates. He said attendees at the Ag Bankers Conference expect interest rates will continue higher in the short term.
“We had about 280 people in the room here for our pre-conference seminar with FinPac. We put a poll up, and we said, ‘What do you think is going to happen to interest rates in the next 12 months?’ Overwhelmingly, the majority of the room said higher short-term rates and higher long-term rates. So, the expectations of a lot of bankers in this environment are, ‘Hey, we’re going to see that yield curve shift up,’ which, you know, me as a borrower, if I’m borrowing for my home or for my business or for my farm, I’m thinking, ‘Well, I better take advantage of these rates today.’ So, I think that’s all the conversations Farmer Mac is having with lenders are, ‘Hey, let’s make sure and communicate that rates can go up. They’re not always going to just come down.’ That’s the environment we’ve been in. That’s not always the environment we’re going to see. And bankers in this room today at the ABA Ag Lenders Conference, said, ‘Yeah, we kind of believe the same thing.’”
Takach says even with rates maintaining, farmland values should also remain strong.
“The room overwhelmingly said increase, so they think land values are going to go up. But the panel that we had up on the stage disagreed and said, ‘Hey, there’s supply and demand equilibrium concerns.’ Like the demand for farmland seems really, really solid, but could there be an increase in the supply of available farmland for sale? Maybe it’s farm exits, or maybe it’s folks who are in need of liquidity who decide to sell off a piece of their farming operation. All that might lead to higher supply, which kind of points to an equilibrium, right? Maybe full land values trade sideways. Some markets will go up, some markets will go down a little bit, but overall, will kind of trade sideways.”
In this year’s Ag Bankers Survey, Takach said one trend is an increasing demand for credit.
“Historically, agriculture is a very under-leveraged asset class industry. So, if you look at the average loan-to-value, so total debt divided by total value of assets, in housing, it’s, you know, say, 40 percent, in commercial real estate, maybe 20 to 30 percent, in agriculture is 10 percent, so it’s historically under-leveraged asset class. I see there being more need for leverage and more demand for capital coming through the farm economy in the next, say, 12 to 24 months.”
Takach explains how government payments affect lending perspectives in the countryside.
“I was always taught, and I think most of the industry is taught to treat government support program payments as nonrecurring income. So, you can use them to think about, ‘Hey, how profitable was this year versus prior years,’ but not to think about pushing those into your pro formas or projections. That practice is probably becoming more prevalent where you see people actually say, well, maybe I don’t project 100 of what the farmers got last year, but there’s some percentage of that I’m going to carry forward next year. I don’t think that’s necessarily a bad idea, but it’s good to know what’s the range, and what would be the debt coverage without? Oh, it was zero, and what’s the debt coverage with, you know, 40 percent or something like that, so that’s a practice I’m seeing more in the industry. I hope these types of program payments are done smartly to encourage markets to dictate profitability and not just rely totally on government cheese.”