Farm Credit System Reports Decline in Loan Quality

At its monthly meeting today, the Farm Credit Administration board received a quarterly report on economic issues affecting agriculture, together with an update on the financial condition and performance of the Farm Credit System (System) as of June 30, 2019.

Although the levels of portfolio credit risk are acceptable, they are rising, and this increase underscores the significant operating challenges facing System borrowers. Overall, the System remains financially safe, strongly capitalized, and well-positioned to support agricultural producers, says Farm Credit.

Amid trade disruptions, production uncertainty, and large global stocks, the Food and Agricultural Policy Research Institute projects crop prices to remain weak. As a net exporter, the U.S. farm sector depends on global demand for its agricultural products. Slower economic growth in key U.S. agricultural export markets is a growing concern.

Also, in part because of retaliatory tariffs by China, U.S. exports are down overall from 2018 — even though shipments have increased to other markets. To help offset the impact of retaliatory tariffs, USDA outlined a 2019 Market Facilitation Program (MFP) in late July. These program payments represent considerable support for the U.S. farm sector. In areas with good yields, the payments could lift average crop margins from at, or below, breakeven levels to positive levels. Elsewhere, producers will depend on crop insurance indemnities to recoup some of their production losses.

Land values generally have remained stable, supported by the limited supply of farmland for sale. Farm sector real estate debt has been rising for the past several years and is approaching the historical 10-year average. Also, total farm debt relative to income in 2019 is high, but the MFP has slowed its advance.