Higher Production Costs 

Facing Agriculture 

Steven R. Koenig, ODAE

Brent R. Duey, OE

FCA Board Meeting 

February 2022

1
Agenda 

▶ Inflation environment for 2022 

▶ Cost inflation in agriculture

▶ Impact on FCS borrowers and portfolios 

▶ Examination & oversight

2
Price “inflation” dominates economic concerns 

▶ Disrupted supply chains hinder

ability to meet strong demand:

 Government stimulus continues

 Pandemic still impacting

worldwide production

 Distribution bottlenecks slow to

resolve

 Global energy supply not meeting

demand

 Tight labor markets

Broad Price Rise 

* CPI-U.S. Medical Care Services, BLS-Average Hourly Private Wages, CPI-At 

Home Food Prices, JD Powers-Average New Car Price, FHFA House Price Index, 

USIA-Regular All Formulations Gas. 3

Yearly Price Increases - December 2021*
Rising production costs in agriculture

▶ Prices paid for farm inputs 

increased 10% from mid2020 to December 2021 

▶ Prices received by farmers 

jumped 24% during the same 

period

▶ Prices paid by farmers are 

sticky, prices received by 

farmers are volatile 

Indexes of Ag Prices and Production Prices Paid 

Data source: USDA/NASS.

4
Broad rise in farm input costs

▶ Historically high fertilizer 

costs are a big challenge for 

crop producers 

▶ Certain chemicals and seeds 

are higher this year 

▶ Higher labor, feed, and 

capital costs are challenges 

for livestock

Broad Rise in Farm Input Costs 

Data source: USDA/AMS.

5
Higher capital costs: farmland 

▶ Strong farm profits, 

particularly in cash grains, 

have translated into higher 

farm real estate values

▶ Higher rental rates in 2022

▶ Land rents are stickier than 

land prices

Land Prices Take Off Again 

Data Source: Iowa State University, December 2021.

6

Source: Farmers National Company Agent Survey, January 2020 and 2022.

Average Sale Price Increase per Acre for High Quality Land, 2020 to 2022

$9,751
Higher capital costs: machinery and 

improvements

▶ New and used farm 

machinery values are 

higher on strong demand, 

lean inventories, and 

supply chain issues

▶ Higher material and labor 

costs are increasing 

building costs across the 

food system

Tractor and Combine Prices Rise 

7

2020 2021 Yearly Change

5,030 6,272 24.7%

2,988 3,536 18.3%

19,144 23,762 24.1%

Source: Association of Equipment Manufactures.

Annual New Equipment Sales 

Self-Propelled Combines

Four Wheel Drive Tractors 

100+ Horsepower Tractors

Units sold 
Higher capital costs: interest rates 

▶ Rising borrowing costs are 

ahead for the $450 billion in 

total farm debt

▶ More System loan rates are 

now locked in for longer time 

periods but still about half of 

System loans carry floating 

rates

Sources: Atlanta Federal Reserve Bank (accessed 2/1/22) and FCS Funding 

Corporation Information Statements. 8

0 to 6 

Months

6 Months 

to 1 Year

1 to 5 

Years

Over 5 

Years Total

Total Gross 

Loans 

(millions)

9/30/2021 46.9% 6.8% 26.3% 20.1% 100% $325,784

12/31/2020 54.0% 8.3% 23.1% 14.5% 100% $315,490

12/31/2019 51.9% 7.1% 24.3% 16.8% 100% $286,964

Share of total

Loan Repricing Intervals for System Loans
Farm finances are strong going into 2022 

▶ Farmers, and the food 

industry in general, have the 

financial health to weather 

higher costs - at least initially

▶ Near-term outlook is 

encouraging

▶ Longer-term concern: Risk of 

a “Cost-Price Squeeze” for 

some parts of the ag industry

U.S Farm Income

Source: USDA/ERS. 9

Source: USDA/ERS, December 1, 2021.

Source: Univ. Illinois, December 3, 2021.
Lender outreach

▶ Surveyed System lenders to gain additional insight on how the 

current environment is impacting customers/portfolios

▶ Questions focused on:

▪Most significant cost pressures faced by customers

▪Estimated impact on borrowers and portfolio in 2022 and beyond

▪Growth and volume implications

▪Underwriting considerations

10
Lender responses: most significant cost 

pressures

▶ Inputs – particularly fertilizer, substantially higher

▶ Labor – cost and availability will encourage automation

▶ Land – prices and cash rents at/near record levels

▶ Infrastructure/Equipment – increasing construction costs for 

facilities and machinery in short supply

▶ Transportation – trucking availability and shipping rates

▶ Water – cost and availability

11
Lender responses: key takeaways

▶ Margins projected favorable in 2022, yet lower than 2021 

▶ Input prices will likely cycle down based on supply/demand 

▶ Higher fixed cost structure may be more permanent

▶ Borrowers can absorb expected increases in interest rates from 

the current low levels

▶ Pricing, risk management, and contract discipline necessary

12
FCS portfolio impact: credit quality

▶ Most institutions have included high-cost scenarios as part of 

existing stress-testing efforts

▶ Lenders do not expect significant adversity in 2022 as projected 

margins remain generally favorable, but lower than 2021

▶ Possible decline in credit quality is “down the road” as both 

borrowers and portfolios are starting from a position of strength

▶ Deterioration could occur sooner in Agribusiness portfolio versus 

producers as more sensitivity to interest rates, labor and supply 

chain issues

▶ FCS portfolios are diversified which provides some risk mitigation

13
FCS portfolio impact: growth/volume

▶ Operating loan usage is generally down from historical levels as 

profitability is more than offsetting higher costs

▶ Mortgage loan volume has increased as rising land values and 

higher sales activity have largely offset lower demand from capital 

improvement projects 

▶ Moderate overall growth is expected for 2022

14
FCS underwriting considerations

▶ Front-end guidance and projections have been updated to account 

for the current environment

▶ No material underwriting adjustments were reported given: 

▪Underwriting standards and practices are designed to be “through 

the cycle”

▪Near-term and long-term repayment analysis is typically completed 

▪Higher costs but also higher revenues thus far – margins are 

projected to be narrower, yet remain favorable

▶ Lenders believe underwriting and risk rating systems are designed 

to account for various cyclical factors, including higher costs

15
FCA examination & oversight

▶ Fiscal 2022 National Oversight Plan includes risk topic of “Loan 

Underwriting in a Period of Significant Volatility” 

▶ Examination work to evaluate: 

▪Analyzing, underwriting and servicing of accounts in 2022, with a 

focus on the cash grains sector

▪Sources and quality of new loans/growth

▪Cost increases and related volatility

▶ Will continue to focus management discussions and monitoring 

activities on impacts of the current high-cost environment

16
Questions

17

Thank You