Author: Cesar Escalante

In recent years, the South has emerged as the top regional employer of H-2A workers.  The Southern states’ demand for H-2A workers has been increasing (from 118,437 positions in 2019 to 143,415 in 2021), mirroring the same trend in its share of the country’s H-2A pool. Over the same period, the region accounted for 43 to 45 percent of the total number of H-2A positions certified by the Department of Labor. 

A closer look at the region’s H-2A labor certification requests indicates that most workers work in the fruit, vegetable, and horticulture industries.  The smaller business scales of these Southern industries relative to their peers in other regions can partially explain the region’s strong demand for H-2A workers.  

When the farm labor shortage problem arose due to stricter immigration controls, domestic workers generally lacked the motivation and willingness to supply replacement farm labor for the evicted undocumented workers.  Under such conditions, farmers’ coping strategies include, among others, input substitution through increased mechanization, optimizing family labor potentials, and shifts in production methods and crop choices.  Smaller farms normally face financing constraints that render the mechanization alternative infeasible for their farming situations.  Hence, when the other non-mechanization strategies have been exhausted, these farms rely on the H-2A solution.

H-2A employment discussions are inextricably linked to adverse effect wage rates (AEWR), which is the minimum wage that H-2A workers must receive.  The AEWR benchmark is set to ensure that H-2A wages are not too low and would not cause a downward market pressure on U.S. wages of workers in similar occupations.     

Regional AEWR trends indicate that rates in the South are the lowest among the regional averages during the three-year period.  Interestingly, among the five regions (Figure 1), the South’s average annual agricultural wages per worker are consistently closest (among regions) to the national average annual wages per worker (79 to 81% of wages for ALL industries) and the average annual wages per worker for the economy’s Goods Sector (65 to 69% of combined wages for the sector’s industries that include agriculture, construction, and manufacturing).  Notably, Southern states posted higher annual AEWR increments this year than the other states, so their current rates are now at par with the other regions.  When these two arguments are taken together (the lowest regional gap between agricultural wages and national/goods sector wages AND the 2023 re-adjustment of AEWR levels to national standards), the South has indeed taken an aggressive stance in addressing workers’ welfare issues in the region.

Table 1.  Regional H-2A Program Patronage and Adverse Effect Wage Rates, 2019 to 2021

REGION	NUMBER OF H-2A CERTIFICATIONS			REGIONAL SHARE of H-2A CERTIFICATIONS			AVERAGE ADVERSE EFFECT WAGE RATES
	2019	2020	2021	2019	2020	2021	2019	2020	2021
ATLANTIC	48,887	37,843	39,693	17.68%	13.75%	12.52%	12.95	13.68	14.33
MIDWEST	19,609	21,440	24,683	7.09%	7.79%	7.78%	13.36	14.34	14.94
PLAINS	12,550	14,931	16,820	4.54%	5.42%	5.30%	13.66	14.22	14.94
SOUTH	118,437	122,247	143,415	42.84%	44.41%	45.23%	11.52	12.17	12.44
WEST	76,991	78,790	92,458	27.85%	28.62%	29.16%	13.55	14.23	14.98
ALL STATES	276,474	275,251	317,069				12.96	13.68	14.28

Figure 1. Ratios of Agricultural Wage Per Worker to National (All Industries) and Sectoral (Goods Industries) Wage Rates Per Worker

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Escalante, Cesar L., and Shree Ram Acharya. The South as the Nation’s Primary Regional Employer of H-2A Labor. Southern Ag Today 3(25.3). June 21, 2023. Permalink

In 2023, the adverse effect wage rate (AEWR), which is the reference minimum hiring rate for H-2A workers, increased by 2.66 to 15.47 percent in all U.S. states (except Alaska). Florida registered the highest annual increase, with incremental rates in six other states exceeding 10 percent (Table 1).  

There are two possible explanations for these 2023 AEWR growth differentials across states. First, sharp spikes in 2023 AEWRs may be associated with lower historical AEWR growth trends. From 2019 to 2022, AEWRs in states with the ten highest 2023 AEWR increases grew annually by only about 3 percent, while states with the ten smallest 2023 AEWR change registered an average growth of almost 6 percent. Figure 1 shows that these two trends are negatively correlated, thus supporting the contention that larger 2023 AEWR increases may have been designed to make up for lower annual AEWR growth rates from 2019 to 2022.

The other explanation revolves around gaps between AEWRs and livable wage levels in 2022. Livable wage, calculated by the World Population Review, measures the amount of income that can adequately cover basic family needs.  In this analysis, a gap exists when AEWR is less than the livable wage per hour (LWH), indicating that AEWR could not adequately satisfy all basic needs; a surplus exists when AEWR exceeds LWH.   Based on the summary in Table 1, all Top 10 states have AEWR-LWH gaps in 2022 as their ratios are below 100%.  In contrast, five of the bottom ten states registered AEWR-LWH surpluses in 2022.  Figure 2 plots the relationship between these two trends, where a no-gap demarcation line is drawn at the 100% level to distinguish surplus (above 100%) and gap (below 100%) situations. 

From a business standpoint, stark increases in 2023 AEWRs may cause potentially harmful economic effects on labor-intensive, H-2A-dependent segments of each state’s agricultural industry. These are serious concerns, especially for states where H-2A workers account for a larger proportion of their annual hired farm labor complement. Last year, H-2A workers in Georgia and Florida comprised 62.88 and 55.31 percent of their hired farm labor force.     Notably, Florida and Georgia had the two highest annual AEWR increases in 2023. 

From a social standpoint, there will always be pressure to correct gaps between actual and livable wages.  At the same time, it is important to understand the broader impacts of such corrective measures.  One-time (abrupt) sharp increases in AEWRs may fix one problem but create a challenge elsewhere.  Alternatively, corrective adjustments implemented in tranches, or gradually over time, could avoid the development of large living wage gaps while allowing farm businesses to make gradual strategic adjustments in preparation for additional costs.

Table 1. Relating 2023 AEWR Increases to Annual AEWR Growth and Livable Wage-AEWR Gaps Among States with Ten Highest and Ten lowest 2023 AEWR Growth Rates

STATE (RANK of 2023 AEWR Increase)	2022-2023 INCREASE	AEWR ANNUAL CHANGE (2019-2022)	LIVABLE WAGE GAP (AEWR/LWH)	2022 AEWR-LWH GAP RANK Worst (#1) to Best (#49)
Florida (1)	15.47%	3.36%	70.35%	6
Georgia (2)	14.01%	2.53%	68.63%	4
South Carolina (2)	14.01%	2.53%	54.52%	1
Alabama  (2)	14.01%	2.53%	54.80%	2
Minnesota (5)	12.82%	4.33%	89.15%	25
Wisconsin (5)	12.82%	4.33%	79.23%	13
Michigan (5)	12.82%	4.33%	69.90%	5
Louisiana (8)	9.80%	3.21%	78.25%	12
Mississippi (8)	9.80%	3.21%	60.53%	3
Arkansas (8)	9.80%	3.21%	77.09%	9
South Dakota  (40)	5.22%	4.63%	101.42%	43
Nevada (41)	4.88%	5.89%	95.64%	37
Utah (41)	4.88%	5.89%	93.86%	34
Colorado (41)	4.88%	5.89%	102.16%	44
Hawaii (44)	4.29%	3.96%	102.22%	45
Washington (45)	3.22%	5.03%	110.26%	48
Oregon (45)	3.22%	5.03%	106.29%	47
West Virginia (47)	2.66%	6.10%	93.54%	33
Tennessee (47)	2.66%	6.10%	90.37%	28
Kentucky (47)	2.66%	6.10%	88.98%	24

Figure 1.  2023 AEWR Increases and Average Annual AEWR Growth (2019-2022), All U.S. States

Figure 2.  2023 AEWR Increases and 2022 AEWR-Livable Wage Ratio, All U.S. States

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Escalante, Cesar L. “Social and Business Implications of the 2023 Increase in Adverse Effect Wage Rates.” Southern Ag Today 3(9.3). March 1, 2023. Permalink

After decades of litigation and settlements of lawsuits alleging discriminatory lending decisions, lenders have learned valuable lessons to increasingly “objectify” their loan decision-making procedures.  The resulting “more objective” loan evaluation models consider borrowers’ business profitability, liquidity, solvency, and repayment capability – in addition to credit histories and collateral arrangements, among other considerations.   

One may ask if these “objective, more transparent” decision models have increased minority farmers’ access to credit.  The reality is that farm businesses operated by certain ethnic groups are typically smaller, less profitable, and with liquidity concerns – thus not always faring well in those lenders’ models.

Even if certain minority farmers get their loan applications approved, they must still negotiate another hurdle – the packaging of their loan terms.  Table 1 presents a compilation of information on the approved loans for beginning farmer clients of the Farm Service Agency (FSA) from 2004 to 2014.

The most favorable loan package for any borrower should combine a relatively lower interest rate and longer loan maturity, which would result in lower periodic loan amortization amounts.  The trends in Table 1 indicate that Hispanic and Black farmers received higher interest rates than the rest of the approved borrowers.  The average loan term for Hispanic borrowers, however, was longer (and comparable to White borrowers’ terms), hence could have tempered the unfavorable high interest rate effect.  In contrast, Black farmers were prescribed the shortest average repayment term, which may pose a potential liquidity concern when combined with higher interest rates.

From the lenders’ perspective, loan terms are additional tools for credit risk management.  Specifically, borrowers’ credit risks are factored into loan packaging decisions, so lenders are inclined to prescribe higher interest rates and shorter loan maturities to borrowers with higher credit risk profiles.  When this rationale is factored into the interpretation of lending statistics and trends, then it becomes clearer that the more urgent priority in addressing minority farming issues is to implement effective reforms geared towards helping smaller minority farms overcome persistent hurdles that threaten their economic and financial viability.    Only then will these farmers gain better credit access and command the most favorable lending terms when their loan applications are approved.

Table 1.  Comparative Lending Terms Packaged for Approved FSA Loans of Beginning Farm Borrowers from different racial/ethnic groups

FSA lending terms	White	Black or African American	American Indian	Asian	Hispanic or Latino
Obligated loan ($’000)	104.57	52.00	97.36	69.71	76.00
Interest rate (%)	2.92	3.27	3.07	2.78	3.91
Loan maturity (year)	17.48	14.92	19.35	12.90	18.64

Source: Ghimire, J., C.L. Escalante, R. Ghimire, and C. Dodson. “Do Farm Service Agency Borrowers’ Double Minority Labels Lead to More Unfavorable Loan Packaging Terms?”  Agricultural Finance Review.  80,5 (2020): 633-646.

Escalante, Cesar L.. “Loan Packaging Terms for Beginning Minority Farmers Under More Objective Lenders’ Loan Evaluation Models“. Southern Ag Today 2(44.3). October 26, 2022. Permalink

In March of this year, inflationary pressures alarmed the U.S. economy as the consumer price index increased by 8.5 percent, the highest increment in the last 41 years.  The Federal Open Market Committee (FOMC) promptly adjusted the federal funds rate (FFR), its main policy tool for regulating inflation. Among other effects, a higher FFR triggers increases in short- and medium-term lending rates (with indirect influence on long-term rates).  Rising interest rates consequently serve as disincentives for borrowing. When loan volumes decrease, the money supply circulating in the economy is controlled, thus eventually lowering inflation.

How do these FOMC decisions affect farm lending?  Based on available farm lending rates from the 10^thFederal Reserve District, average variable farm interest rates for the 1^st quarter of 2022 for short- and long-term loans were 4.93 and 4.56 percent, respectively.  These levels are expected to go up with further FFR hikes projected this year.  However, current interest rates are still below the most recent highs (6.50 and 5.89 percent, respectively) registered when FFR was at its post-recession peak (2018) of 2.5 percent (Figure 1).  Shortly before the onset of the Late 2000s Great Recession (in the last two quarters of 2016), short- and long-term farm interest rates were even higher, reaching 9.15 and 8.36 percent, respectively. 

Figure 1:  Average Quarterly Variable Farm Interest Rates for Short- and Long-Term Loans, 10^th Federal Reserve District, 2002 (2^nd Quarter) to 2022 (1^st Quarter)

How would the farm lending sector fare under these conditions?  Several studies establish the farm sector’s resilience and ability to maintain good credit standing even during periods of economic adversity.  During both the late 2000s recession and the current pandemic conditions, loan delinquency rates among farm borrowers were significantly lower than their non-farm borrowing peers.  Moreover, the surge of banking failures in 2007-2009 only included a negligible fraction of agricultural banks.  This year, as the economy deals with new challenges, farm lenders already have expressed their confidence in the farm sector’s ability to withstand evolving economic concerns.  After all, its latest balance sheet credentials are strong. 

Trends in the valuation of farmland, the major asset in the farm balance sheet, have usually been regarded as a critical barometer of the sector’s financial health.  Latest national estimates from the National Agricultural Statistics Service (NASS) reported in August 2021 indicate a 7 percent increase in farm real estate values compared to August 2020 levels, with cropland values registering larger increases (7.8 percent) than pasture values (5.7 percent).    Notably, average 2021 farmland values in all states in the Southern region increased over their 2020 levels, with the growth in the Southern Plains exceeding the national rate at 9 percent, while the Southeast, Appalachian, and Delta states registered annual increments of 2.7, 2.4, and 1.6 percent, respectively (Figure 2).

Figure 2:  Average Farm Real Estate Values per Acre, U.S. and Southern Regions, 2017-2021

More recent, survey data for the 1^st quarter of 2022 from two Federal Reserve Districts – Seventh (Iowa, and most of Illinois, Indiana, Michigan and Wisconsin) and Tenth (Colorado, Kansas, Nebraska, Oklahoma, Wyoming, northern New Mexico, and Western Missouri) – reflect a sustained acceleration trend in farmland values at even more substantial year-over-year gains of more than 20 percent.

As inflationary and economic growth concerns persist, the farm economic outlook may be tempered by the effect of rising input prices on farm incomes; consequently, slowing down and limiting future farmland valuation gains.  Nonetheless, lenders expect the farm sector to hold its ground, given some liquidity cushion accumulated over sustained growth in recent periods.  Hopefully the sector will continue to uphold its usual prudent borrowing behavior, making borrowing decisions that are practical, cautious, and not necessarily driven by the credit limits commanded by appreciated collateral property – much like what caused the 1980s farm financial crises.

Escalante, Cesar L. . “Inflation Control, Farm Interest Rates, and Farmland Values“. Southern Ag Today 2(25.3). June 15, 2022. Permalink

According to the latest national agricultural census (2017), minority farmers account for 9% of the country’s population of beginning farmers.  Asian and Hispanic Americans register the two largest shares of beginning farmers at 40.23 and 36.33 percent, respectively, of their group’s population.  Compared to other minority farmers and their White peers, farmers of Asian and Hispanic origins are usually 5 years younger than the average 60-year old American farmer and operate significantly much larger and more profitable businesses.   

The need for more new entrepreneurial activities in farming is well known, as the sector confronts an aging farmer population and business succession issues.  External financing is crucial to beginning operations, and access to credit has been a perennial concern among budding entrepreneurs unable to compete well with established firms in their loan applications.  After all, regular lenders’ loan approval decisions are not primarily based on business potentials but instead rely more heavily on concrete historical indicators, such as business and credit track records that start-up firms naturally do not have.

Beginning minority farmers can find financial support from USDA’s Farm Service Agency (FSA) through its loan programs designed to cater to their situations – one targeted towards the socially disadvantaged and another for beginning farmers. Consistent with its overriding mission to be the “lender of first opportunity”, FSA’s credit risk assessment policies deviate from commercial/private lending industry norms and may resolve the start-up borrowers’ otherwise limited access to credit.  Notably, FSA’s lending policy explicitly excludes the following in ascertaining “unacceptable credit history:” (1) any foreclosure, judgment, bankruptcy, or delinquent payment caused by temporary circumstances and beyond borrower’s control; (2) isolated instances of late payments that do not indicate an overall delinquency pattern; and (3) lack or absence of a history of credit transactions. Thus, as FSA opens its doors with such provisions, farms operated by beginning minorities can have a greater chance at overcoming start-up hurdles and building flourishing businesses.

Selected Revenue and Income Statistics, By Farmers’ Ethnic/Racial Group

Escalante, Cesar L. . “Alternate FSA’s Lending Programs for Beginning Minority Farmers“. Southern Ag Today 2(9.3). February 23, 2022. Permalink