CHICAGO--(BUSINESS WIRE)--Favorable growing conditions and better harvests this fall could put continued pressure on corn prices, but Fitch Ratings expects U.S. farm lenders' asset quality metrics to remain solid moving into 2014.
Over time, a pull-back in crop prices and land values from record levels could cut farmers' incomes and net worth modestly across the U.S. Corn Belt. However, we believe generally prudent underwriting practices by lenders in the Farm Credit System (FCS) have mitigated risks of a sharp rise in credit losses, even if crop prices remain depressed.
Some long range forecasts see the potential for corn prices to remain below $5 per bushel for several years. This type of sustained price weakness, coupled with a fall in farmland values, would put nominal pressure on Corn Belt incomes and asset quality.
We observe that farm lenders, such as AgriBank, which has the most exposure to farmland within the FCS, have utilized conservative per acre debt caps and land price forecasts derived from sustainable crop price assumptions for underwriting purposes. The level of debt that has been taken on by farmers is relatively small compared with the recent run-up in land prices, strengthening farmers' balance sheets. We believe these two factors should prove to be adequate mitigants to asset quality concerns over the near to midterm.
Signs of modest weakening in farm credit fundamentals appeared this summer. The most recent surveys of farmland prices by the Chicago and Kansas City Fed indicate that the rapid land price gains of recent years are moderating or stopping altogether this year. Still, there is little evidence in these reports that lower crop price expectations are leading to increased borrowing.
Cash flow pressures on corn and wheat farmers are likely to increase in the third quarter as the harvest is complete. Expected revenue declines driven by lower prices could be moderated somewhat as a result of much stronger production levels given that generally cool and wet conditions have boosted output significantly from last year's drought-affected levels.
We also note that declining grain prices are a positive for cattle and pork producers that have seen heightened margin pressure over the last few years as feed prices have risen. Therefore, cash flow fundamentals for livestock loans are likely to improve this year, offsetting some of the modest income declines experienced by borrowers in the grain sector.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
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