As ag and rural banks enter 2024, a host of legislative issues currently being debated stand ready to affect the course of their clients’ business for the foreseeable future.
By Ed Elfmann and Christopher Delporte
American humorist Will Rogers, often called the cowboy philosopher, said: “The farmer has to be an optimist, or he wouldn’t still be a farmer.” It’s an opinion that must resonate with farmers and ranchers today as much as it did 100 years ago when Rogers said it.
Most U.S. farmers—and the banks that serve them—have had some reason to be “glass-half-full” folks over the last few years. Despite the global pandemic and the challenges it created—not to mention other economic factors at work, such as higher feed, fuel and labor costs; rising interest rates; and increased fertilizer prices—the U.S. agricultural economy has been remarkably resilient. Farmland value has been strong, and so has farm income. According to the U.S. Department of Agriculture, U.S. farms reported an annual increase of $46.5 billion in income (49.2%) in 2021. For 2022, the USDA expects net farm income to reach $147.7 billion, an increase of $7.3 billion, or 5.2% from 2021.
“The agriculture sector faced continued headwinds in 2022 due to remaining COVID-19 induced supply chain disruptions, shocks to supply and demand, volatility in commodity prices, and geopolitical uncertainty,” wrote the authors of ABA’s’s recent Farm Bank Performance Report. “However, robust federal support of the agricultural economy, careful portfolio management and consistent growth in high-quality capital have kept banks healthy and ready to continue supporting America’s farmers and ranchers.”
For this year, analysts predict that agribusiness will begin to show signs of financial strains and adjustment. In 2023, according to USDA forecasts, net farm income will decrease by $25.9 billion (15.9%) from 2022 to $136.9 billion. Farm sector production expenses are forecast to increase by $18.2 billion (4.1%) to reach $459.5 billion in 2023. This follows a 5.1% increase in nominal expenses in 2022. If these forecasts are realized, 2023 production expenses would be the highest on record since 1970. Interest expenses and livestock/poultry purchases are expected to increase in 2023 while spending on feed and fuels/oils is expected to decline relative to 2022.
Overall, USDA forecasts total agricultural sales to decrease $23.6 billion (4.3%) to $519.9 billion in 2023. Direct government payments are forecast to decrease by $5.4 billion or 34.4% because of lower supplemental and ad hoc disaster assistance to farmers and ranchers compared with past years. After reaching a record high of $45.6 billion in calendar year 2020, direct government farm program payments decreased to $25.9 billion in 2021. They are forecast to decrease further to $15.6 billion in 2022 and $10.2 billion in 2023.
Government’s influence on the agriculture sector, of course, isn’t limited to farm program payments. There are several legislative issues currently being debated on Capitol Hill that farm banks, farmers and ranchers and related businesses are keeping a watchful eye on during this legislative session. Below, we outline a few of the issues identified by ABA’s Agricultural and Rural Bankers Committee as priorities for their institutions and their clients.
Progress by the ACRE
Fair and robust access to credit is a critical issue for agricultural businesses—a unique slice of the small-business community. The Access to Credit for our Rural Economy, or ACRE, Act is bipartisan legislation that will benefit rural America by lowering the cost of credit for rural America. The ACRE Act removes the taxation on the income earned from interest on lending to farm real estate, rural home mortgages and aquaculture. ACRE Act would amend IRS code to level the playing field for community banks to administer agricultural real estate loans by granting them tax exempt status on earned interest. This same exemption already applies to farm credit institutions. This exemption would also apply to single-family home mortgage loans in rural communities with fewer than 2,500 residents and for mortgages less than $750,000.
ACRE would lower the cost of making a loan backed by agricultural real estate, thereby increasing community bank participation in the rural real-estate market. It also would enhance competition between lenders for agricultural and rural housing loans, lowering the cost of credit for rural borrowers, in addition to expanding access to local credit in rural America by enabling more community banks to make agricultural real estate and rural home loans.
The ACRE Act was introduced in the House of Representatives (H.R. 3139) by Doug Feenstra (R-Iowa) and Wiley Nickel (D-N.C.) and as of mid-October had 41 sponsors or cosponsors—28 Republicans and 13 Democrats, more Democrats than have ever signed on to any version of ACRE’s predecessor bills ACRE also been introduced on a bipartisan basis in the Senate (S. 2371) by Jerry Moran (R-Kan.) and Angus King (I-Maine).
“Over the last few years, rising interest rates and record inflation have increased operating costs for our farmers, stifled young producers from entering agriculture and prevented families in rural America from securing a home mortgage,” says Feenstra. “We need to give our Main Street lenders much-needed flexibility to offer agricultural and home loans at affordable rates to grow our rural communities.”
According to ABA economic analysis, the ACRE Act will provide a 50 to 150 basis point reduction in interest rates to over 17,000 communities. There will be a continued push to get as many cosponsors as possible for ACRE. Additionally, ABA will continue to advocate for hearings in House Ways and Means and Senate Finance committees to push the bill forward.
The (Farm) Bill, please
Every five years, Congress passes an omnibus piece of legislation that focuses on agriculture, rural America, and nutrition programs. This legislation is better known as the Farm Bill. The 2018 version of the legislation expired on Sept. 30.
There have been several hearings throughout this year in anticipation of the 2023 Farm Bill, which is currently being written by agriculture committee staff. Because the bill passed its expiration date and the House is gridlocked by its search for a speaker, it’s likely that there will be a short-term extension to the 2018 Farm Bill, possibly until Dec. 31. The same thing happened in 2018. What does this mean for bankers? Not much, if there’s only one extension. If there is an extension beyond December, there likely will be issues with loan programs across USDA, and it will be difficult for farmers and ranchers to use USDA commodity programs.
There are a few things to watch over the next few months regarding the 2023 Farm Bill. First, the agricultural appropriations bill will provide insight on how members of Congress may vote for the 2023 Farm Bill. Additionally, there are rumors that the 2023 Farm Bill will have Senate floor time in October. It should be noted that after the legislation passes both the House and Senate, there will have to be a conference committee to work out the differences that will likely exist between the two pieces of the legislation. Keeping all of this in mind, it’s more likely that the 2023 Farm Bill will not be completed until December of 2023.
According to reporting in Politico, however, lawmakers have begun to publicly acknowledge that passing a Farm Bill extension before the end of the year will likely be their only option given the current state of the House—as compared to passing a new Farm Bill and reconciling it with the Democratic Senate’s version.
“We have no choice but to extend it,” Rep. Kat Cammack (R-Fla.), a House Agriculture member, said of the current bill.
FSA: The ’90s called and wants its technology back
With each new Farm Bill, the ABA Agricultural and Rural Bankers Committee develops a list of priorities that bankers would like to see in the legislation. One of the priorities for this Farm Bill is modernization of the USDA’s Farm Service Agency loan programs. What would FSA modernization look like? Currently, FSA loan programs lack the technology to effectively and efficiently work with the technology seen in the banking system.
Electronic signatures are one example of the need to bring FSA into the 21st century. At present, to get an electronic signature, a borrower must go to an FSA office to sign an electronic pad. In a post COVID-19 world, this lags way behind the technology used by banks. It should be noted that increased technology will increase efficiency for FSA loan programs, which is needed as the number of retirement-eligible FSA loan officers continues to increase. ABA is advocating for increased technology funding specifically earmarked for FSA loan programs.
Another area of the FSA loan program process that needs to be updated, is the definition of “beginning farmer,” according to Caleb Hopkins, loan production officer with Dakota Mac in Halbur, Iowa. FSA defines a beginning farmer as one who substantially participates in a farm operation but has not operated a farm or ranch for more than 10 years. An applicant also must not own a farm or ranch greater than 30 percent of the average size farm in the county at the time of the loan application. Hopkins maintains that today’s economic realities keep “beginning farmers” away from the farm until later in life.
“Today, the beginning farmer is less likely to be the new high school or college graduate who comes home to work the family farm, then tries to buy a farm in a few years. That is how it used to work,” explained Hopkins, who in his mid-30s and purchased a farm with his wife four years ago. “People are graduating college, and they’re working 9-to-5 jobs at banks, John Deere or at a supply store, and they help out at the farm on the side before and after work and on weekends until there’s an opportunity. Capital costs have outpaced these young people. They’re getting the experience, but it’s been longer than 10 years and they’re no longer considered beginning farmers by FSA’s definition.”
Section 1071 changes to small business loans
At the end of March, the CFPB released its long-awaited final rule implementing Section 1071 of the Dodd-Frank Act, requiring the collection and reporting of credit application data for small businesses, including women-owned and minority-owned small businesses. Section 1071 represents a major change to how banks process and handle small-business loans—taking what for many banks is a tailored financial product and requiring new ways of doing business. The final rule—which covers closed-end loans, lines of credit, business credit cards, online credit products and merchant cash advances—applies to banks, credit unions and nonbank lenders.
Small loans continue to make up over a third of banks’ farm and ranch lending with more than 1.1 million $69 billion in farm and ranch loans under $500,000 on the books at the end of 2022, according to ABA figures. This included more than 693,000 microloans worth over $16 billion.
Under the final rule, a covered financial institution is defined as one that originated at least 100 “covered credit transactions” (rather than 25, as proposed) for small businesses in each of the two preceding calendar years. Covered credit transactions include closed-end loans, lines of credit, business credit cards, online credit products, merchant cash advances, and credit products used for agricultural purposes by banks, credit unions and other lenders. A small business is defined as one with gross revenue under $5 million in the last fiscal year. Small businesses will be able to self-identify as women-, minority-, or LGBTQ-owned, and lenders will be able to rely on the financial and other information provided by the small business, the CFPB said. Importantly, loan officers will not be required to make their own determinations of an applicant’s race, ethnicity or any other demographic information—a change to the proposal sought by ABA.
Agricultural purpose credit will be reportable under Section 1071. According to the CFPB, including small-farm lending “furthers the statutory purposes of Section 1071.” Community Reinvestment Act exams have used data on small-farm lending for decades to assess bank responsiveness to smaller farmers’ credit needs. Based on CFPB data, of the 3.4 million farmers in the United States, smaller family farms with revenues of $350,000 or less accounted for about 90% of all farms. In addition to monitoring credit access for small farms, the Section 1071 data will, the bureau says, be critical to preventing discrimination against minority-owned farmers. Consumer-designated credit used in part for business or agricultural purposes (a loan or lines of credit used for mixed purposes but are primarily for personal or family purposes) are exempt from the final rule.
Despite banks’ planning for 1071 compliance, implementation has been slowed. At the end of July, a federal judge in Texas issued an order delaying implementation of the Section 1071 final rule while the Supreme Court hears a challenge to the constitutionality of the CFPB’s funding structure. The injunction came at the request of ABA, the Texas Bankers Association and McAllen, Texas-based Rio Bank in litigation brought challenging the Section 1071 rule and, at press time, was applicable only to ABA and TBA members. (ABA and TBA have asked the CFPB to use its discretion to extend to the delay to all banks.) While ABA and the other plaintiffs have expressed support for the goals of Section 1071, the lawsuit argued that the CFPB took a statute requiring just 13 data points to be collected and added more than 80 data points, failing to properly account for the costs and benefits of the bureau’s vastly expanded requirements. TBA, ABA and Rio Bank also argued the final rule should be vacated because CFPB is unconstitutionally funded.
Under the 1071 rule, the largest “tier one” lenders would need to comply by Oct. 1, 2024, with smaller tier two and three lenders needing to comply by April 1, 2025, and Jan. 1, 2026, respectively. As a result of the injunction, those dates will be pushed back depending on how quickly the Supreme Court issues a decision on the CFPB funding case, with a ruling possibly coming during the first half of 2024. That potentially could delay compliance for ABA and TBA member banks as much as six to eight months, regardless of the outcome of the case.
The ACRE Act, Farm Bill, Section 1071 and FSA modernization are just a few of the issues that face the ag sector in the near term. Topics such as Farm Credit System reform and oversight, broader FSA modernization, rural development issues (broadband access, infrastructure), and estate tax reform, among others, remain priorities for ABA’s Agricultural and Rural Bankers Committee. We’ll explore these topics and more in the coming year in the Banking Journal, with webinars and in the monthly Ag Banking newsletter.
Ed Elfmann is SVP for agricultural and rural banking policy at the American Bankers Association. He is based in the Midwest, where he continues to work on his family’s farm. Christopher Delporte is a senior editor of the ABA Banking Journal, as well as senior editorial director at ABA, where he edits ABA’s Ag Banking Newsbytes email bulletin.
Christopher Delporte
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