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Agricultural Finance and Lending Outlook

2023 Family and Farmsteading Program

August 26, 2023

Ryan Loy, Ph.D.

Assistant Professor and Extension Agricultural Economist

Department of Agricultural Economics and Agribusiness

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My Background

Hometown: Plano, Texas

Suburb of DFW

Recently Moved to Benton, AR
Oklahoma State University

B.S. Agribusiness
M.S. Agricultural Economics
Ph.D. Agricultural Economics

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Making a Positive Impact on Arkansas

My Extension Program Focus:

Farm Financial Education

Farm Management
Farm Finance
Risk Management

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Farm Financial Education

Maximizing Production
Optimal Allocation of Resources
Business Planning

Farm Management

Farm Programs
Budget Resources
Finance 101

Farm Finance

Market Activity
Value Added Marketing Channels
Macroeconomy/Profitability

Risk Management

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Roadmap

Weather Update
Current Challenges to a Farm Business
Metrics for a Successful Farm Business
Financial Assistance Program Opportunities
Questions

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Weather Update

WPC 7-Day Rainfall Forecast (NOAA)

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Current Challenges to Farm Businesses

Input Costs and Commodity Prices
Land Values
Labor
Interest Rates
“2023” Farm Bill

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Input Costs

All fertilizer prices reported to Bloomberg are about 18% lower compared to January.

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Commodity Prices

Russia – Ukraine War (Black Sea Grain Deal)

Markets are unlikely to be impacted (as of now).

Corn Acreage -> Corn Price

Soybean Demand

Expansion of low-carbon diesel markets.

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Land Values - 2023

Farmland values have steadily grown.
Value increase ~ 8% in Q2 (2023).
Interest rates and Farmland.
Climate, drought, and financial conditions.

More Info: https://www.kansascityfed.org/agriculture/agfinance-updates/farmland-values-stay-resilient-as-farm-economy-moderates/

Considerable strength in farmland markets has pushed values above what may be expected given the current interest rate environment and prospects for financial returns from cash rents. Reported values of farmland in the District have continued to rise steadily in recent months as the estimated value based on the relationship between cash rents and benchmark interest rates (capitalized value) has dropped considerably (Chart 12). Capitalization values provide a way to evaluate the combined effects of interest rates and returns^[1]and have declined alongside the rapid increase in interest rates and a moderation in cash rents. Some moderation in farmland values could be expected given these downward pressures, particularly for more marginal or less productive tracts, however, a steady supply of land sales and strong demand from farmers has likely supported broad resiliency of real estate values.

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Labor

The Hired Farm Workforce is Aging

Fewer young immigrants

Real Farm Wages grew at 1.8%

Labor is harder to find
Farm Wage ($16.62) < Nonfarm Wage ($27.56)

H2A Visa Workers

Cost, Timeline, and Eligibility

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Interest Rates – Is a Recession on The Horizon?

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Interest Rates – Federal Reserve

March 2022:

Fed began raising interest rates
525-basis points (as of today)

Current rate: 5.12%
Inflation (CPI): 3.2% (July 2023)

Lowest since Oct. 2021

Next Meeting: Sept 19-20

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Interest Rates – Operating Loans

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Interest Rates – Farm Level Impacts

Operating loans rates > Federal Funds Effective Rate

Currently 8.03% (Kansas City Fed Survey – Q2 2023)
Compared to 3.66% (Q2 2022)

Budget, Budget, Budget:

Prepare Early
Check Regularly

Est. Interest Cost 2024 example (Corn)

Fertilizer: $303.30/ac
Seed cost: $104.00/ac
Pesticides: $87.85/ac
Fuel (Irrigation and Equipment): $24.59
Interest: $519.74 x 0.0803 = $41.74/ac
Using 2022 rate: $19.02/ac

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“2023” Farm Bill

Farm Bill Status

A toss up if it can be passed.
Reauthorization.

~ $1.3 trillion
Farmer Safety Net
Sustainability
Title 2

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Metrics for a Successful Farm Business

Liquidity

Current Ratio

Working Capital (WC)

WC to Gross Revenues

Solvency

Debt to Asset Ratio

Equity to Asset Ratio

Debt to Equity Ratio

Profitability

Net Farm Income

Rate of Return (Assets and Equity)

Profit Margin

Repayment Capacity

Term-Debt Coverage Ratio

Replacement Margin Coverage Ratio

Financial Efficiency

Asset-Turnover Rate

Depreciating Expense Ratio

Net Farm Income Ratio

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Working Capital

Current Assets – Current Liabilities
Provides Short-term Financial Reserves
Balance Sheet

Debt to Asset Ratio

Debt Owed/Assets Owned
Higher Ratio = Higher Leverage

Net Farm Income

Income After Expenses From Production
≠ Profit and Must Cover Debt and Living

Term-Debt Coverage Ratio

Capital Dept Repayment Capacity/ Total Annual Debt Requirements

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Title 2 - Conservation

Provides Technical and Financial Assistance to Boost a Farm’s Environmental Sustainability.

Voluntary, market-based incentives to adopt conservation practices

NRCS – USDA

https://www.nrcs.usda.gov/programs-initiatives

While conservation efforts have existed in farm policy since the very first farm bill, they became more prominent when the conservation title was created in the 1985 farm bill. The programs in Title II provide financial and technical assistance so that farmers and ranchers can proactively manage soil and water quality, improve wildlife habitat and enhance carbon sequestration efforts to boost the farm’s or ranch’s environmental sustainability without compromising its economic viability.

The conservation title has provided farmers and ranchers with voluntary, market-based incentives to adopt various conservation practices through land retirement programs like CRP and working lands programs like EQIP and CSP. While the 2018 farm bill increased enrollment limits in CRP, actual acreage enrolled has declined. The adjusted CRP rental rates implemented in the 2018 farm bill better align the program with current local farmland market conditions to prevent the government from barring farmers and ranchers from accessing prime farmland. So far, this change has encouraged farmers to install resource-conserving practices on environmentally sensitive farmland and helped keep highly productive land in production using good stewardship practices that can preserve wildlife habitat, soil and water. The working lands programs like EQIP and CSP have allowed private land to continue to be in production and have helped to provide cost-share assistance to implement conservation practices. However, the demand for these programs has consistently outpaced the amount of funding provided in the 2018 farm bill.

The Inflation Reduction Act’s $18.05 billion for working lands programs will potentially allow more producers to access these working lands program funds to implement conservation practices. Additional agriculture-specific provisions in the IRA total nearly $40 billion for spending on programs and initiatives ranging from farm bill working lands conservation and technical assistance, as mentioned in this article, to rural development and forestry. There continues to be questions about whether or not the added IRA funds contribute to added baseline dollars for the 2023 farm bill. Until those questions are answered, the current expectation is that Congress has provided more to over-subscribed working lands programs, rather than land retirement programs, with more technical assistance on voluntary incentives to help producers meet their conservation and sustainability goals.

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Title 2 - Programs

Environmental Quality Incentives Program (EQIP)

Improved water and air quality
Soil conservation practices (mitigate drought and improve soil)
Example: Organic Initiative

Conservation Stewardship Program (CSP)*

Develop a conservation plan based on management objectives
Expands benefits of clean water, air, healthy soil, and wildlife habitat
Enhance resiliency to weather and market volatility
Example: cover crop

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Title 2 – Programs (Cont.)

Conservation Reserve Program (CRP)

Yearly payments to remove sensitive land from agricultural production
Contracts are 10 – 15 years in length
Re-establish land cover for soil and water health
Example: hunting leases

Wetland Reserve Enhancement Partnership

Protection, restoration, and enhancement of wildlife habitat
Integrate wetland restoration on working lands
Example: duck lodges

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USDA – Financial Assistance

Focus:

Beginning Farmers and Ranchers
Underserved Farmers and Ranchers
Small-Scale Producers

Ownership vs. Operating Loans
Direct vs. Guaranteed Loans
Inflation Reduction Act Assistance

$3.1 billion to USDA
Discrimination focus

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Thank You!! Questions?

Ryan Loy

University of Arkansas Division of Agriculture
2301 S University Ave, Little Rock, AR, 72204
Office: 307L
rloy@uada.edu
(214) 642-9066

My Website