Trump's trade wars are exacerbating problems in the U.S. agricultural sector. The downturn is being felt in state revenues, agricultural loan performance and corporate earnings. Banks with loan exposures to the Midwest need to review their portfolios closely.
Unfortunately, recent data are showing that my fears are justified, especially when it comes to Midwest states, heavily affected by the state of the agricultural sector. Almost seven years of low agriculture prices, recent floods, trade tensions, and tariffs are impacting agriculture borrowers. According to theWashington, Louisiana, and California have the largest amount of targeted exports.
Fortunately, loan restructuring has helped borrowers not reach the adverse credit quality and default levels of the 1980s. Yet, data are starting to show that ongoing trade tensions do not bode well for the US agricultural sector. Net farm income, which is a broad measure of profits, is forecast to increase 10 percent in 2019 but remain below the 25-year average.
Farm banks’ liquidity should also be monitored carefully. According to the FDIC, “Farm bank liquidity has declined and funding is under pressure because of strong loan demand. The need for financing has increased because of declining net farm income, rising operational costs, and dwindling working capital, turning many farm customers from net depositors in past years to net borrowers in recent years.” Deposit and asset growth have decreased while loans have been growing.
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