KBRA Financial Intelligence

Surging Federal Subsidies May Dent Bank Lending to Farmers

After successive declines in farm income throughout 2023-24, the U.S. Department of Agriculture (USDA) has forecast a 29% jump in net farm income for 2025, which could bode well for farmers throughout the remainder of the year. However, cash receipts and production expenses are expected to be largely unchanged, with the projected rebound in net income mainly driven by a fourfold rise in direct government farm payments to $42.4 billion. This level of federal subsidy is nearly on par with payments made to farmers in 2020, which were supercharged by pandemic-era spending.

Two years of declining income, rising interest costs, and reduced government support appear to have intensified financial distress for some U.S. farmers, as new data from the American Farm Bureau Federation shows farm bankruptcies increased for the first time since 2019 last year, up 55% compared to 2023 levels, and reaching a total of 216. Farm bankruptcies remain well below the record annual pace of nearly 600 set in 2019.

Subsidies May Hasten Agriculture Lending Slowdown

Despite recent declines in net farm income and an uptick in U.S. farm bankruptcies, it should be noted that delinquency rates for both primary categories of agricultural lending—real estate loans secured by farmland and loans for agricultural production—have continued to trend below the overall delinquency rate across all credit types for 11 straight quarters, dating back to 2Q 2022. Moreover, the proportion of agricultural loans currently past due remains well below pre-pandemic levels.

The growth trajectory of total agricultural lending by U.S. commercial banks weakened as interest rates increased throughout 2023-24, but the two main components have recently followed diverging trends. While the growth of real estate loans secured by farmland has generally mirrored the path of total bank lending, loans to finance agricultural production have diverged sharply, rising more than 14% year-over-year (YoY) in 1Q 2024, and far surpassing total loan growth of just 1.7%. In fact, the growth rate of loans financing agricultural production has outpaced the growth of commercial real estate (CRE) farmland lending and total bank lending across each of the past seven quarters.

Although the initial economic disruption caused by COVID-19 led to a modest decline in total bank lending volumes, agricultural production loan volume dropped more sharply and was slower to recover. Generous government stimulus payments may have supplanted a portion of the capital that farmers and ranchers would have otherwise sought from banks, temporarily subduing demand for agricultural production loans until those government funds began drying up in 2023 and 2024. Therefore, a resurgence in subsidies in 2025 could potentially suppress demand for agricultural production loans once again.

In addition to federal subsidies, farmers facing difficult financing terms offered by banks may increasingly turn to government-backed farm lending programs, many of which were expanded last year. As of September 2024, the USDA’s Farm Service Agency introduced several policy changes that established new deferment and low-interest opportunities for distressed farm borrowers, as well as options for extended loan terms, interest-only payments, and reduced collateral requirements.

Disasters and Drought Drive Subsidy Boost

The key driver behind booming federal subsidies for farmers and ranchers is disaster aid. Nearly half of the USDA’s projected total for direct government farm payments in 2025 is tied to disaster relief funding provided under the American Relief Act of 2025, which was signed into law late last year. In our recent analysis of banks potentially affected by wildfires that swept through Los Angeles County earlier this year, KBRA Financial Intelligence (KFI) noted that, excluding biological disasters, 2024 recorded the second-highest number of Federal Emergency Management Agency (FEMA) disaster declarations on record. Per the National Oceanic and Atmospheric Administration (NOAA), the U.S. was slammed by 27 separate weather disasters, each inflicting more than $1 billion in damages. The U.S. was beset by 1,796 tornadoes, the second-highest annual count in NOAA data, with the vast majority striking states across the Midwest that are rich in farmland and ranchland. States including Illinois, Iowa, Ohio, and Oklahoma experienced record-breaking numbers of confirmed tornadoes.

Although total farm expenses are projected to decline this year, they could be impacted by the onset of a drought expected to strike just before most key crops enter planting season in April. Per the U.S. Drought Monitor, more than two-thirds of the continental U.S. is currently experiencing abnormally dry or drought conditions. Although the key Midwest region is largely dealing with dryness levels similar to this time last year, the High Plains region is suffering severe, extreme, or exceptional drought across more than 30% of its landmass—up from less than 5% in late March 2024.

The situation appears even more dire in the South, where severe drought or worse now affects nearly 45% of the region. The most severe southern droughts are impacting the cattle-rich plains of Texas and Oklahoma—the top two states for beef cow production. While water shortages can hinder the production of grains and other crops, they can also reduce the supply of livestock. The U.S. cattle inventory has slumped to a more than 70-year low in 2025, following years of persistent drought and rising input costs that have forced ranchers to cull livestock and market an increasing share of their female cattle. If dryness worsens, it could disrupt previous expense projections by driving up costs for irrigation, fertilizer, and feed for both farmers and ranchers.

Individual banks and credit unions’ exposure to agriculture lending and other loan categories can be identified by utilizing the Data Wizard in KFI’s Excel add-in. The performance of these institutions’ loans, as well as their KFI Scores, can be compared against their peers in the Loan Category and Delinquency Report template from our Template Library. KFI Scores are proprietary quarterly financial assessment scores that measure the financial health of all U.S. banks and credit unions on an A through E scale using Call Report data. Our models incorporate various asset quality, capital adequacy, earnings performance, and liquidity and funding measures for managing counterparty risk and robust peer analysis. To access our full library of KFI Scores and data tools, request a demo with KFI.