Agriculture Sectoral Review - What data can you harvest to improve your risk exposure?

Lumio Solutions has been a trusted partner of a number of Agricultural focused banking institutions over the years. Despite improvement in fundamentals and farmland values, credit quality and volatility in net farm income, and weak loan demand remain top concerns for Ag Lenders. Federal and state grants due to Covid-19 helped farms in 2020 and kept down loan demand, but increasing prices particularly in corn should lead to increased loan volumes in 2021.

As an experienced Credit Portfolio leader with over two decades of experience in this space, I felt it necessary to share some key insights that can help risk leaders understand the interplay of internal and exogenous factors, stay agile and build resilient portfolios. Through the power of our consulting credit review expertise and Lumio's Enterprise Risk Management capabilities, we help our clients quickly assess evolving trends in the US agriculture market - putting them in the position to build and maintain portfolios with the best risk-adjusted returns.

Agriculture Industry

• In contrast to what had been a quite long expansion in the broader U.S. economy, agriculture sector had been in a downturn even before the pandemic with non-accrual rates rising since 2014.

• The pandemic disrupted ag sector from March-May 2020 largely through impact to demand for food, food exports, biofuels, and farm labor.

• Conditions have improved fairly notably since April 2020, due in significant part to government payments (among the highest on record as a share of farm income), but also more recently a substantial increase in agricultural commodity prices.

• Short term outlook looks solid for non-protein Ag even as risks emanating from new strains of coronavirus, strength of USD and labor issues. In 2021, Ag Protein sector will face additional pressure in the form of higher forecast feed costs, but are expected to experience a more stable demand pattern.

• Following years of steady deterioration, various measures of agricultural credit improved in 4Q2020 driven by increases in prices as well as strength in farm real estate.

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Pre Pandemic trends

In contrast to what had been a quite long expansion in the broader U.S. economy, agriculture sector had been in a downturn even before the pandemic. U.S. net farm income had strong years from 2010 to 2013, followed by a fairly rapid decline in income along with reductions in commodity prices.

Incomes improved modestly since 2016, but during the course of the past several years, much of this had also been due to government payments. In-spite of improvement in incomes, liquidity in ag-sector stayed constrained as input costs increased at a faster pace than changes in ag prices.

In 2019, Ag sector had to deal with widespread adverse weather conditions during the planting of spring crops, with less-than-favorable conditions lingering throughout much of the growing season. It was the wettest year on record, and the cold conditions and slow planting progress hampered acreage. Harvest season wasn’t much better, and a lot of corn acreage wasn’t harvested until the following spring. Net farm income, while rising for the third year in a row, remained well below levels seen from 2010 to 2014. Lower production for corn and soybeans reduced stocks that had risen the previous year, in part, due to trade uncertainty.

The year 2020 began with solid global economic growth and a renewed sense of optimism in the agricultural sector when the US and China signed the Phase One trade agreement that sought to cool the trade tensions that had roiled agricultural markets for much of the prior 18 months. However, soon after, the WHO reported the first confirmed case of COVID-19 outside of China.