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What Plummeting Farm Income Means for Banks

Count farmers among the many who were not thrilled that this week’s inflation numbers came in hotter than expected. They have been challenged by rising labor, equipment, and other costs, while at the same time some key commodities—corn and soybeans among them—are commanding less money.  

Net farm income is expected to drop to $116 billion this year, Reuters reported this week, down 27% from last year and 38% from 2022. That’s “the biggest two-year decline in net farm income by percentage since 1983, when the U.S. rural economy was caught in a major agricultural crisis.” 

So, what does this mean for banks? The squeeze on farm income could make an already challenging lending line even more so. A recent RMA article notes that most farmers use the cash method of accounting for tax reporting, booking expenses when they pay them and deferring crop revenue until cash changes hands. For farmers, that makes bookkeeping simpler and creates favorable tax management scenarios. But for their lenders, it can cloud the picture of how they are performing. 

This lack of clarity places even more importance on prioritizing the “five Cs of creditworthiness”—character, capacity, capital, collateral, and conditions—according to Todd Doehring of Centrec, a consulting and agricultural lending education firm. “You don’t want to just lend money to someone based on a projection,” he says. Lenders also need to know if the borrower has “shown the ability to withstand the ups and downs of agriculture.”  

Especially when the next down period may be on the horizon.  

Learn more: RMA regularly offers an Agricultural Credit Analysis course. Course and registration information are here.