CHICAGO--(BUSINESS WIRE)--The expected passage of a new five-year farm bill next week will end an impasse in Congress over the extension of federal support to US agriculture. Bipartisan backing for the bill ends a long period of uncertainty over federal support, but Fitch Ratings believes the legislation should only have a minor impact on credit quality for banks in the Farm Credit System (FCS) and agricultural borrowers.
The House passed the bill on Jan. 29, and the Senate appears likely to follow suit and send the bill to the president for his signature next week. The bill extends funding for key crop insurance programs, price supports and the Supplemental Nutrition Assistance Program through 2018. The end of the farm bill debate should allow farm lenders and borrowers to plan more effectively, without fear of dramatic changes to federal farm policy over the next few years.
The bill ends funding of direct payments to farmers, regardless of how much they produce. While this could hurt smaller farmers, the overall impact on US farm incomes is expected be relatively small. The direct-payments program totaled $5 billion annually, compared with an estimated 2013 gross cash income of $450 billion for US farmers.
The more significant element of the bill is the extension of federal subsidies for crop insurance premiums. The federal government covers approximately 62% of these premiums, a material financial contribution that is likely to have a real cash flow impact for crop farmers. The bill also includes an extension of the dairy program that will offer milk producers more certainty regarding future payments.
The more important issue for FCS credit quality over coming years will likely be the expected slowdown in farmland price appreciation. After several years of rapid rises in farmland values, prices appear to have begun plateauing over recent periods. This would represent a bigger threat to farm asset quality than anything included in the new farm bill. However, Fitch believes that reasonable steps have been taken by the FCS to mitigate potential credit deterioration, such as debt caps per acre and maximum loan-to-value limits below the typical regulatory threshold.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.