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Bankers ponder three big things in 2021

Heather Malcolm and John Blanchfield for Progressive Dairy Published on 19 January 2021

As a result of the pandemic, bankers are thinking about new lending risks

Good riddance, 2020. Everybody, including bankers, had to learn how to do things differently last year.



Back in March, if you would have had said “Zoom,” most of us would have thought you were talking about taking a picture or a trip to the moon. The pandemic forced bankers to adjust to a new normal – often not being able to work out of their offices, curtailing field visits to customers, figuring out new ways to communicate with customers and making sure the needs of their customers were being met. Because of 2020, bankers have a different outlook on 2021. While it isn’t all negative, there are some concerns among bankers that producers should be aware of. This is especially important while producers make plans for 2021, including requests for financing. As always, we urge producers to get the 2020 books closed as quickly as possible and get into the bank with your financing requests. Bankers are going to be extremely busy this spring.

Is there an asset bubble in the making? Land, which represents over 80% of your balance sheet assets, has been enjoying a healthy increase in value. Thanks to a very accommodating interest rate environment courtesy of the Federal Reserve and an outward flow of people from populated areas of the country to rural America, rural real estate values have increased nationwide. The rapid appreciation in values feels to us like the run-up in values prior to the bursting of the residential real estate bubble in 2007-08. Is rural America headed for another speculative real estate bust? While nobody can answer that question with certainty, you can bet bankers across the country are examining their loan-to-value ratios to try to mitigate any overheated real estate lending.

And it isn’t just real estate that is experiencing a boost. Demand for farm machinery, both new and used, is experiencing a healthy updraft. In part, this was driven by year-end tax management strategies, but it is also happening because low interest rates are encouraging producers to finance new stuff. If you need new stuff, this is a great time to finance it – but only if you need it. Just because interest rates are low, you should not load up on debt because what the Federal Reserve gives, they can take away. There is a lot of uncertainty in this farm economy. We don’t believe there will be rewards for those who are highly leveraged.

How long will these very low interest rates be around? In 2020, we saw some operations expand as well as some beginning farmers and ranchers purchasing new ground because they were able to lock in some very favorable long-term rates. Many operators restructured debt, which we hope set them on a better path moving forward. If we get a handle on the COVID-19 pandemic, in mid-2021 we might see the Federal Reserve become less accommodating on interest rates. Again, nobody really knows, but you can safely bet bankers are thinking about the future direction of interest rates.

Producers, especially those who have a lot of variable-rate debt, ought to be having serious discussions with their bankers right now about how they can take advantage of these historically low rates. If you can demonstrate adequate repayment ability, this is a once-in-a-lifetime opportunity to lock in low rates. Remember: Interest rate risk exposure can and should be hedged just like crop inputs costs, milk prices and fuel. But you have to have a plan and you have to execute the plan. Talk to your banker and do it now.


Will government payments be as robust in 2021 as they were in 2020? The 2020 farm economy wasn’t particularly healthy going into the pandemic. Fortunately, the government intervened mightily in 2020. Direct payments will top $46 billion in 2020, more than a 107% increase compared to 2019. According to the USDA, total net cash farm income in 2020 will be around $134 billion. Thirty-four percent of the entire net cash income of U.S. agriculture in 2020 came from direct payments. There is no doubt government payments made the difference between 2020 being a financial disaster for producers and their bankers to being a relatively decent year. Government payments were widely spread throughout the farm economy. For example, even cow-calf operators in Montana received an additional 10 cents to 20 cents per pound for their calves through CFAP I and CFAP II.

In large part due to increased government payments, 2020 farm income will be the highest it has been in the last six years. Will this continue into 2021? Farmers and ranchers should use the bounty of 2020 to get healthy financially and restore a little working capital. There is nothing wrong with having some cash socked away. For bankers, the question is, what will farm income be in 2021 if producers don’t get another massive injection of cash from the government?

There were many challenges in 2020. Fortunately for farmers and ranchers, 2020 turned out to be much better than was expected at the beginning of the year. Bankers across the country are closely watching asset values, interest rates and government payments as they prepare for the 2021 lending season. Producers should do the same and plan accordingly.  end mark

PHOTO: Getty images.

Heather Malcolm was the 2020 chairman of the American Bankers Association’s Agricultural and Rural Bankers Committee. John Blanchfield owns Agricultural Banking Advisory Services, an independent consultancy which works for banks that lend money to farmers and ranchers. Email John Blanchfield.

Heather Malcolm
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