Government payments soften COVID-19 blow to ag economy

Federal Reserve Bank updates offer insight into agricultural conditions in Midwest.

Given the widespread adverse effects of the coronavirus pandemic in the second quarter of 2020, agricultural credit conditions for the Midwest and Central regions of the U.S. weakened compared with a year earlier, according to the latest agricultural updates from the seventh and 10th districts of the Federal Reserve Bank. However, government assistance is anticipated to boost farm income and support credit conditions

The effects of the COVID-19 pandemic continued to pressure the agricultural economy and weigh on farm finances in the 10th District, including Kansas, western Missouri, Nebraska and Oklahoma. Farm income in the second quarter declined at the quickest pace since 2016, and weaknesses in both income and borrower liquidity were expected to carry into the coming months, according to the latest "Ag Credit Survey" of the Federal Reserve Bank of Kansas City, written by economist Courtney Cowley and assistant economist Ty Kreitman.

Agricultural credit conditions remained weak overall but relatively stable. “Looking to the coming months, however, bankers expected farm borrowers to have greater difficulty repaying loans. Some of the current stability in credit conditions may be attributed to government programs that provided revenue support and additional financing options for borrowers,” Cowley and Kreitman wrote.

Nearly 95% of respondents throughout the region indicated that support from the Coronavirus Food Assistance Program (CFAP) was likely to boost farm income and support credit conditions. A majority of banks expected the effect of the direct payment assistance to be “moderate,” and about 30% characterized the support as “significant.”

Respondents also anticipated that the Small Business Administration’s Paycheck Protection Program (PPP) would provide material support. About 90% of respondents indicated that the program would support farm income and credit conditions. Similar to CFAP, most expected the effect of loan assistance to be “moderate,” with about 20% describing the support as “significant.” PPP, along with other lending programs such as Economic Injury Disaster Loans, likely will supplement the borrowing needs of agricultural producers who are able to utilize the funds for eligible expenses.

Although the pace of decline in repayment rates in the second quarter remained similar to the first quarter, bankers expect farm borrowers to have more difficulty making loan payments in the next three months. However, like previous years, only 27% of bankers reported some level of repayment problems, and on average, less than 3% of farm loan applications were denied. Some bankers noted that although they expect some deterioration in the coming months, most concerns related to the repayment capacity of farm borrowers remained manageable in the second quarter.

Government programs, such as CFAP and PPP, may have reduced the need for traditional financing options. In addition, amid weaker financial conditions surrounding COVID-19, there may have been some hesitation to extend new financing.

In the latest "AgLetter" from the Federal Reserve Bank of Chicago, Ill., senior business economist David Oppedahl said the portion of the district’s agricultural loan portfolio reported as having “major” or “severe” repayment problems -- at 8.3% -- had not been higher in the second quarter of a year since 1988. Furthermore, renewals and extensions of non-real-estate farm loans during the April through June 2020 period were higher than during the same period a year ago, with 49% of survey respondents reported more and just 1% reported fewer renewals and extensions.

For the April through June 2020 period, demand for non-real-estate farm loans was nearly the same as a year earlier, while the availability of funds for lending by agricultural banks was higher. For the second quarter of 2020, the district’s average loan-to-deposit ratio was 77.6%. Average nominal interest rates for feeder cattle, farm real estate and operating loans ended the second quarter at their lowest points in the history of the survey.

Survey responses revealed broad financial distress from the COVID-19 pandemic in rural areas. Respondents indicated that 97% of their lending areas were at least modestly affected by the pandemic in the first half of 2020 — larger than the reach of extreme weather events in 2019.

Moreover, according to responding bankers, 30% of their agricultural borrowers were significantly affected by the pandemic in the first six months of 2020, and another 51% were modestly affected.

Corn and soybean prices have been pressured down by pandemic-related factors and have also been weighed down by forecasts of large harvests due to increased plantings and mostly favorable crop conditions. Using trend-line yields, the U.S. Department of Agriculture estimated in July that the 2020 corn grain harvest would be 15.0 billion bu. (second only to the record set in 2016) and the soybean harvest would be 4.1 billion bu. (the fourth largest of all time). USDA estimated prices for the 2020-21 crop year at $3.35/bu. for corn and $8.50/bu. for soybeans.

“When calculated with these prices, the projected revenues from the 2020 U.S. harvests relative to revenues from the previous year’s would be 2.5% larger for corn and 15.7% larger for soybeans. So, even with lower expected crop prices, corn and soybean revenues in 2020 should bounce back from their levels in 2019, when they struggled,” Oppedahl wrote.

In the Chicago region, credit for the second quarter of 2020 was again tighter than in the previous year, as 23% of survey respondents reported that their banks required larger amounts of collateral than a year ago; none reported that their banks required smaller amounts.

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