(NDAgConnection.com) – The top concern facing agricultural lenders going into 2023 is interest rate volatility, according to the 2022 Agricultural Lender Survey report produced jointly by the American Bankers Association and the Federal Agricultural Mortgage Corporation, more commonly known as Farmer Mac.

Nearly half of respondents (49.0%) ranked interest rate volatility among their top two concerns, up 35.5 percentage points from last year. While rising rates have helped bolster bank net interest margins, a combination of higher funding costs, fears of weakening loan demand and strong competition is expected to cut into rising yields, according to the report released today at the ABA Agricultural Bankers Conference in Omaha, Neb.

“Given the Fed’s clear signal that it expects to continue raising rates until inflation is contained, it’s fitting that ag lenders cited interest rate volatility as their number one concern,” said ABA Chief Economist Sayee Srinivasan. “Lenders expect that both short-term and long-term rates will continue to rise in the coming year, reflecting market expectations that rates could rise by another 100-150 basis points by the end of the first quarter of 2023.”

In response to the survey, lenders cited inflationary pressure as their number one concern for producers. Liquidity and farm income, two of the top two concerns in prior years, were the second and third greatest concerns this year, respectively. Lenders remain comparatively more concerned about weather and less concerned about total leverage than in prior survey years, according to the report. Recession risk, a new category this year, was lenders’ fifth highest ranked concern for producers. By comparison, lenders ranked “a slowing economic recovery” near the bottom of their list of concerns for producers in 2021.

“Many of America’s farmers and ranchers experienced a strong recovery in 2021 and 2022, driven by higher commodity prices and robust sales,” said Jackson Takach, Chief Economist at Farmer Mac. “Looking ahead, ag lenders are keeping a close eye on expenses, as feed, fertilizer, fuel, and other input costs remain elevated.”

Respondents’ level of concern for all categories of commodities fell this year. Lenders reported the highest levels of concern for the dairy, fruits and nuts, and beef cattle sectors, but concern for each sector showed improvement over 2021 levels. Lenders’ concerns notably declined for grains over the year.

For the second consecutive year, most ag lenders (66.3%) reported that overall farm profitability increased in the last year. About one in ten lenders (10.3%) reported that overall profitability declined. Lenders expect conditions to deteriorate next year, with 52.6% projecting a decline in farm profitability in the next 12 months. However, this remains well below the 2016-2020 survey average of 82.3%.

Approximately four out of five ag lenders reported rising land values in 2022, consistent with results from the 2021 survey. However, a growing percentage of lenders expected land values to slow down (59.4%) or decline (12.7%). Cash rents were also reported higher in 2022, with 72.2% of lenders reporting higher rents in their market areas and 43.2% of respondents expecting cash rents to continue to rise in the next 12 months, potentially adding to inflationary pressures for producers.