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Down on the Farm (But Not Out)

Farming, often seen as a backbone of the U.S. economy, has its own unique rhythm of highs and lows. And this year, according to Department of Agriculture projections, is expected to be much more valley than hill (click here to see just how far farm income is expected to fall). While this might raise concerns for some, bank risk managers are taking a broader view, recognizing the particular dynamics of farming and the resilience of the sector. Here are key takeaways from a new RMA Journal article on the topic: 

Location Matters: Despite the projected decline in farm income, experts emphasize the importance of considering local conditions and the specific circumstances of each farm. Todd Doehring from Centrec Consulting Group highlights the variability in production and prices, emphasizing that farmers will experience financial shifts differently based on their operations. 

Equity Values Are Rising: Despite the projected downturn in farm income, it follows several boom years, leading to improved debt ratios and rising farm equity. Nick Klein of Ephrata National Bank in Pennsylvania notes that while concerns about a farmland bubble have existed, farm equity continues to rise, indicating a degree of stability in the sector. 

Need Grows for Operating Loans: While farm loan repayment rates have slowed slightly, delinquency rates remain low. However, the decline in crop prices and higher operating costs suggest an increased need for operating financing. Lending volumes have already shown an uptick, particularly for larger operating loans. 

Banks Are Watching: To navigate uncertain conditions, bank risk managers are advised to implement rigorous risk management practices. This includes stress testing borrowers under different price scenarios, ensuring sufficient loan coverage through tightened loan-to-value ratios, and reviewing the liquidity and cash reserves of borrowers. 

These Are Long-Term Relationships: Banks maintain close relationships with farmers, offering advice and support during tough times. This includes sharing information on state programs, crop insurance options, and risk management strategies. Despite short-term challenges, banks remain committed to supporting farmers in the long term. 

Read the complete article here