MINNEAPOLIS (DTN) -- Repeated rounds of ad hoc government payments in recent years are complicating assessments of farmers' financial strength, raising questions for agricultural lenders about whether borrowers can repay loans or buy land if the assistance stops.

If there were a repeated theme at the American Bankers Association Agricultural Bankers Conference, it's uncertainty about the level of ad hoc government payments to producers and what it looks like for farmers when those payments stop.

"I don't know anyone who doesn't feel a little nervous about government programs," said Sam Miller, a retired banker who now advises and teaches agricultural loan officers. "It certainly has helped maintain cash flows for farmers and maintain the loan portfolio from deteriorating for bankers. But if that goes away, that's going to make it more difficult going forward."

Since 2018, farmers have received $140 billion in ad hoc payments for various reasons -- trade disruptions, the pandemic, low commodity prices and now fuel prices being among them. This year alone, there were the $12 billion Farmer Bridge Assistance (FBA) payments, and then the Trump administration announced $8 billion in aid that will come from the Harvest Fuel Relief Program.

"Every year, the United States government seems to just keep kicking out billions and billions of dollars," said Scott Jarck, vice president of national lending at Agri-Access, speaking to agricultural bankers.

In the ABA's annual ag lender survey, roughly 50% of lenders said that 25% or more of their borrowers' net income was tied to direct government payments. That's up from 30% of lenders who responded the same way a year ago. Going further, 28% of lenders responded that borrowers relied on government payments for as much as 49% of their income.

"The payments have helped stabilize producer financials and may have boosted loan performance in the sector," the ag lenders survey said. "At the same time, record government payments create challenges for underwriting future loan applications, especially when many of the payments are not guaranteed from year to year."

At the same time, more than two-thirds of ag lenders responded in the survey that they expect farmers' reliance on government income to increase in 2027.

Ag bankers at the conference said there were already concerns that 2027 could be the most expensive crop that grain farmers will ever grow, which again could lead to more ad hoc aid demands.

"I've heard concerns over next year, 2027, from, you know, their net income margins being compressed," said Jeff Meeker, chief lending officer and executive vice president at LCNB National Bank in Lebanon, Ohio. "They're feeling pressure from increased prices, expenses, inputs, and also grain prices have dropped here. What's 2027 going to be between fuel, fertilizer, and other inputs?"

HOW DO FARMERS FARE WITHOUT AID?

Speakers urged bankers to separate ad hoc government aid from other income and examine how borrowers would fare without the aid. Those checks can make year-end financial results look workable, he said, while leaving questions about whether an operation can support a land purchase without additional assistance.

"If the music did stop for government payments, what would that actually do to these people's ability to cash flow or to buy land in the future?" Jarck said. "If they keep giving the money out, it's hard to say they're not going to get it next year."

In the ag lenders survey, nearly 80% of lenders indicated they don't include possible government payments in their underwriting if the payments are not already authorized.

Tuesday's election adds another layer of uncertainty. In an interview, David Kohl, professor emeritus at Virginia Tech University, said he expects Democrats to pursue adjustments to government payments and subsidies, although he cautioned against expecting an abrupt policy shift. Instead, he anticipates efforts to temper the use of ad hoc payments.

"I really don't see a knee-jerk reaction," Kohl said.

WHAT IF AD HOC AID STOPS?

Purdue University Agricultural Economist Trey Malone told ag lenders to consider the possibility that ad hoc government assistance ends. Payments arriving late or being distributed under different rules also could disrupt borrowers' finances. Malone urged lenders to examine their 25 largest operating lines without government payments to determine how exposed borrowers would be.

"The agricultural world is in the ad hoc era," Malone told agricultural lenders.

Ad hoc assistance has ranged from negligible to $20 billion a year. Looking at the next two years with the changes in Congress and a lame-duck presidential administration, Malone said farm policy will go into "completely uncharted territory."

"I would anticipate that we're going to see a pretty wild swing in terms of payments," he said. "And even if we get the same number, odds are the distributional mechanism is going to look different, so we're in that ad hoc era. We got to be thinking about what this means."

Malone added, "I'm not saying that the payments won't come, but the payments probably won't look the same as they used to."

Kohl said potential changes to government support are among the agricultural policy issues he is watching following the election.

"I think one of the things that they'll try to do is they're going to make some adjustments, maybe on some of the government payments and some of the subsidies," he said.

ASSESSING REPAYMENT CAPACITY

Multiple speakers urged lenders to consider what would happen to borrowers' cash flow and ability to purchase land if government payments ended. Continued rounds of assistance make it difficult to assume farmers will not receive another payment next year, he said, but there is no certainty about how long the aid will continue.

Malone also cautioned against relying on farmland values when evaluating an operation's ability to repay debt.

"Ultimately land doesn't make the payment," Malone said.

Also see, "Ag Leaders, Rural Bankers Face Washington Reset After Election," https://www.dtnpf.com/…

Chris Clayton can be reached at Chris.Clayton@dtn.com

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