The weather is much more than small talk for farmers. Rain, commodity prices, operational financing and fertilizer and labor costs are hard realities that determine if any given year will be a success or failure.
Community agriculture banks, or ag banks, which generally provide agricultural loans that are at least 25% of total loans and leases, are doing what they’ve always done: keeping close to their customers to help them ride out the uncontrollable ups and downs of farming.
Net farm income was expected to continue to fall in 2024 after reaching record highs in 2022, notes the USDA’s 2024 Farm Sector Income Forecast. In 2022, net farm income reached $185.5 billion, falling to $155.9 billion in 2023. The USDA expects it to be $116.1 billion by the end of 2024.
The downward trend is occurring in all nine USDA regions, with farm businesses in the Northern Great Plains region expected to see the largest declines. With profits down, the average net cash farm income was forecast to decrease to $72,000 per farm in 2024.
The Rural Mainstreet Index also showed a weakening farm sector. The index, for which Nebraska’s Creighton University surveys bank CEOs in rural areas of a 10-state region dependent on agriculture, reported that bankers were fairly pessimistic. “Weak agriculture commodity prices and farm exports combined with downturns in farm equipment sales over the past several months continued to constrain banker confidence,” the report says. In addition, for the first time in almost five years, farmland prices fell.
That said, both ag banks and farmers know that the industry comes with plenty of highs and lows over time, and a rocky agricultural landscape like this one is exactly when farms can benefit from the support of ag-focused community banks.
More than an “aging” demographic
On average, farmers continue to age. However, look behind the 2022 Census stats—conducted every five years—to see a more nuanced picture.
According to the Census, “The average age of all U.S. farm producers in 2022 was 58.1 years, up 0.6 years from 2017, continuing a long-term trend of aging in the U.S. producer population. Producers also tend to be experienced; they have been farming an average of 23.4 years.”
ICBA senior vice president of agriculture and rural policy Mark Scanlan says the numbers are “concerning,” and there are other challenges for farmers, including when their children choose to move to cities instead of staying on the farm to continue their work, and how to form a succession plan for heirs.
At the same time, a hopeful trend is that the number of beginning farmers—identified as having 10 or fewer years of experience—has increased. In 2022, about 1 million of the 3.4 million total producers were beginning farmers, and the average age of these newer farmers was 47.1 years old. Among the younger demographic, farms were smaller than average in both acres and sales.
Ag banks view risk differently
The 2023 Conference of State Bank Supervisors Annual Survey of Community Banks found that ag banks and non-ag banks listed the same three challenges: net interest margins, cost of funds and core deposit growth. But for ag banks, competition and loan demand are significantly more important risks. Location and liquidity drive such differences.
While many ag banks are in small markets with less bank competition, the Farm Credit System (FCS), a government-sponsored enterprise with tax and funding advantages over the private sector, accounts for approximately half of all U.S. agricultural lending.
Doug Fish, president and CEO of $1.25 billion‑asset BTC Bank, says FCS is his community bank’s toughest competition across its footprint of 23 branches spanning from Iowa to Missouri. “We don’t have the kind of long-term, fixed-rate credit products that Farm Credit can offer,” says Fish, noting this is especially true in the real estate category.
He says a combination of factors—including acquisitions and recent moves into new markets—allowed Bethany, Mo.-based BTC to acquire customers who weren’t happy with takeovers nearby that “restricted lending to an extent,” he says.
This growth helped buffer BTC from the past years’ rise in interest rates and operational expenses, including higher input costs for grain farmers and higher prices for those raising and feeding cattle; its borrowers still bought land and equipment. To maintain balance, BTC didn’t make significant changes in underwriting standards yet sought “a little less debt and a little higher equity so that cash flows don’t get stressed to the point that they break,” Fish says.
He notes that BTC’s approach to building relationships is the same it’s been over its 103-year history: The community bank focuses on agriculture, community and youth, in everything from lending to public relations.
Despite difficulties in the ag economy currently, Fish says the up-and-down cycle has existed for years, and his experienced employees will be there for customers in good times and bad.
The First State Bank is located in Cimarron County, which is the least populous county in Oklahoma and has the largest land area to population ratio in the state. Most of the $139 million‑asset community bank’s customers work in agriculture, so up to 90% of the bank’s business is ag-related. As expected, there is a “very small base of local deposits to grow from,” says The First State Bank president Wayne Montgomery.
Even so, the community bank has grown its loan portfolio consistently over several years through real estate financing and outreach to new customers whose previous banks were bought out by bigger regional banks. Those customers weren’t comfortable dealing with bankers they didn’t know, so they moved to The First State Bank.
Seasonal highs and lows
The First State Bank understands that loans are cyclical or seasonal and seeks to manage them for farmers who face challenges including input costs, such as seed and fuel prices.
In Oklahoma’s desert environment, “rainfall is critical to us, and right now it’s pretty dry here—we’re in a drought condition,” Montgomery says, adding that winter moisture determines the success of the farm year. “[Local farmers] wouldn’t be able to survive without crop insurance.”
In addition, some customers recently purchased forage insurance from multi-peril agents, which, in short, pays farmers when it doesn’t rain, which “paid off very well.” These measures, combined with high loan demand and strong net interest margin, resulted in a “pretty good year” for The First State Bank.
As the only bank in the county, First State is poised to do well. Yet, it focuses on “treating customers well” as a priority, while also providing services like financing large farm real-estate purchases. The customer base doesn’t change much; repeat customers operate well in this environment, with folks “adapting well,” says Montgomery.
Future agricultural factors
According to Sustainable Agriculture Research and Education, sustainable agriculture means “producing enough food and fiber to satisfy today’s needs without compromising the ability of future generations to do the same” while still bringing profit to farmers over the long term. Practices include rotating crops, planting cover crops and reducing or eliminating tillage.
Despite the implementation of these practices in some farms, particularly those owned by younger people, community bankers say it has not been adopted on a wide-enough scale to affect their lending programs yet.
Mark Scanlan, ICBA senior vice president of agriculture and rural policy, says change must still produce income, so progress may be slow. “If you are changing the way you farm, then you may have less farm income, so the question is how to repay loans over the time it takes to transition to a different model,” he says.
The Farm Bill is another factor farmers and community banks are keeping an eye on. Scanlan notes that the 2024 Farm Bill won’t alter banks’ programs significantly. Instead, the five-year bill provides a source of continuity, or what he calls the “farm safety net.” It allows lenders to work with customers on business planning on a longer-term basis since they are aware of government programs and price protections.
Bankers must engage with their existing ag customers, says Scanlan. “Sit down and talk about your plans going forward.”
