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Fitch: US Farm Credit System, Banks Face Continued Agri Downturn
February 21, 2017 / 4:01 PM / 7 months ago

Fitch: US Farm Credit System, Banks Face Continued Agri Downturn

(The following statement was released by the rating agency) NEW YORK/CHICAGO, February 21 (Fitch) An ongoing downturn in the agricultural sector should lead to some asset quality deterioration in agriculture-related lending, says Fitch Ratings. However, several mitigating factors should enable the Farm Credit System (FCS) and commercial banks to withstand the downturn. The US Department of Agriculture's (USDA) latest farm sector income forecast points to another challenging year for farmers. The USDA expects net farm income to fall by 9% in 2017, marking the fourth consecutive year of contraction. Overall farm income is generally positive, and net cash income should rise slightly as farmers sell stored inventory. The sustained contraction continues to come off of the historically high levels experienced during a strong cyclical upturn in incomes from 2009-2014. The 2017 net farm income forecast is roughly in line with the annual average prior to 2010. Several factors have contributed to the decline, including low and falling commodity prices linked to improving crop yields, weaker economic growth globally and a strengthening US dollar. Higher debt loads, leading to increased debt service costs, also weigh on net incomes. The resulting weak income outlook has commensurately caused declines in agricultural land prices, with Corn Belt cropland values declining to $6,710 in August 2016 from a peak of $7,000/acre in 2014, according to the USDA. Fitch believes that agricultural-related asset quality deterioration is likely. The length and scale of the farm income contraction, as well as falling land values, have raised questions among some market commentators and investors of the potential for a crisis as was seen in the 1980s. However, several marked differences suggest that the impact on the FCS and agriculture lending at commercial banks will not be nearly as negative. The interest rate and inflationary environment are substantially different. Real and nominal interest rates are expected to remain at historically low levels over the next several years, with inflationary pressures also remaining relatively weak. This contrasts with the late 1970s and early 1980s when interest rates rose dramatically as the Fed sought to tackle double-digit inflation, with the prime rate rising to 20% in 1980 from 7% in 1977. Another key difference is the level of crop insurance. During the 1980s, just 25% of farm acreage was covered by insurance programs compared to 85% today, according to the USDA. While farmers' debt service burden rises, Fitch still projects it to be lower than that of the 1980s and less than the long-term average. The interest expense ratio has been increasing but is still relatively low at a forecast 4% in 2017. The ratio was 8% throughout the late 1970s, rising steadily to a peak of 14% in 1983. Even if rising interest rates increase debt service, anecdotal evidence suggests that farmers have locked in fixed rates for longer tenures than in the 1980s, with around 60% of fixed-rate FCS loans as of Sept. 30, 2016. The FCS is the primary agriculture lender in the US, accounting for around 40% of agricultural loans. Commercial banks act as a secondary credit provider. Fitch does not expect worsening agriculture conditions to affect FCS' or the individual system banks' ratings, which will continue to be directly linked to the US sovereign. Moreover, the system banks' IDRs reflect their prudent, conservative credit culture and structural second-loss position on the majority of their loan portfolios. For US commercial banks, agriculture-related credit represents less than 3% of lending and is concentrated in mainly small, rural banks with less than $1 billion in assets. Fitch believes that the slowdown in the sector is unlikely to be a significant rating issue, with few rated banks having significant agriculture-related concentrations. Contact: Bain Rumohr, CFA Director Financial Institutions +1 312 368-3153 Fitch Ratings 70 West Madison Chicago, IL Justin Patrie, CFA Fitch Wire +1 646 582-4964 33 Whitehall Street New York, NY Media Relations: Hannah James, New York, Tel: + 1 646 582 4947, Email: hannah.james@fitchratings.com. 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. Related Research Agriculture Lending in U.S. (Softening Trend Manageable for Farm Credit System and Commercial Banks) here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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