Ag lending demand increases as farm margins tighten
Commercial lenders could continue to see elevated demand for agricultural loans – particularly for short-term financing to cover operating expenses — thanks to tight profit margins for many producers.
“Loan volumes for almost all farming purposes rose at commercial banks, as many producers contended with tighter profit margins” during the first quarter, said a recent report from the Federal Reserve Bank of Kansas City. “Persistently low crop prices and elevated input costs continued to increase farmers’ short-term financing needs.”
Non-real estate bank loans made to farmers in the first quarter grew by $8.1 billion, or nearly 8 percent, from the year-ago period and totaled $114 billion, according to the Agricultural Finance Databook for April. Increased borrowing for current operating expenses and livestock purchases were the main drivers of the increase in the bank loan type, the report said.
“Current operating loan volumes grew for the third year in a row following several quarters of depressed crop prices,” researchers said.
Looking at loan sizes, the fastest-growing category was loans for $100,000 or more.
Farmers’ profits could see additional downward pressure and stoke more demand for credit to cover expenses, because input costs are expected to decline less than crop cash receipts are expected to decrease, the Fed said.
“Demand for operating loans could remain elevated as futures markets for fall crops show prices are expected to remain low due to the possibility of another record harvest,” the report said.
Loan repayment rates were “slightly weaker” in the fourth quarter of 2014, based on call report data cited in the credit analysis. But Fed officials were quick to note that delinquency rates for both farm real estate and non-real estate loans declined, and profits increased slightly at most agricultural banks. Borrowers’ strong financial positions have helped credit conditions remain “solid,” despite increasing debt in the farm sector, Fed officials said.
“Although [farm] incomes have dropped substantially from recent highs, they were not yet expected to fall below the average of the past 40 years,” the report said. “In addition, extremely low incomes (i.e., 50 percent below the long-run average) have not been observed since 1983 and, in the four years prior to 2015, incomes were extraordinarily high. Multiple years of historically high incomes helped strengthen balance sheets and better prepare producers for the effects of declining prices seen more recently.”
Researchers said lower farm incomes have also hurt some farmland values, although these changes seemed to be highly variable, based on the region and the use of the land. “Farmland values in crop-intensive states decreased slightly, while demand strengthened for good-quality farmland and ranchland in states more concentrated in livestock production or with wealth generated from other sources, such as oil and natural gas exploration,” the report said.
Cropped image credit: Jon Bunting via Flickr CC.