Kansas City Fed Report, “Prolonged Need for Lending Pressures Farm Finances”

Nathan Kauffman and Matt Clark, of the Federal Reserve Bank of Kansas City, indicated in a recent paper (“Prolonged Need for Lending Pressures Farm Finances“) that, “The pace of agricultural lending in the second quarter remained strong. Respondents to the Survey of Terms and Bank Lending to Farmers indicated the total number of non-real estate loans made to farmers in the second quarter increased 6 percent from a year ago (Chart 1). Moreover, the number of non-real estate loans larger than $100,000 made to farmers climbed 11 percent, continuing the trend of recent years.”

The authors pointed out that, “Trends in non-real estate lending activity at commercial banks increasingly have been driven by changes in the short-term financing needs associated with agricultural production. The share of non-real estate loan volumes categorized as current operating expenses gradually has drifted higher since the 1990s, but especially over the past five years (Chart 3).”

The KC Fed report also noted that, “Reduced cash flow also has led to extended maturities for many loan categories to help reduce annual debt payments. Loans used to finance machinery and equipment were extended to an average of 46 months in the second quarter from an average of 28 from 2005 to 2014 (Chart 4).”

In addition, Kauffman and Clark added that, “Reflecting some increased risk associated with agricultural lending, interest rates on operating loans increased to their highest level since 2013.”

Last week’s report also stated that, “In the first quarter of 2016, commercial bank Call Report data indicate total farm debt outstanding expanded almost 8 percent from a year ago. The increase was the 19th consecutive quarter in which total farm debt expanded from the previous year (Chart 6). This increase marks the second longest streak of increasing farm debt since 1988, accounting for inflation, exceeded only by the period from 2003 to 2009 (25 quarters). The current growth in farm debt began during a period of improving farm sector profitability, but has more recently occurred during an era of reduced farm income.

The growth in farm debt during a time of weakening profit margins has led to a modest increase in past due and non-performing loans.”

Nonetheless, the KC Fed report indicated that, “Despite slight increases in loans past due and net charge-offs, returns at agricultural banks remained strong.” (Recall however that, Esther George, chief executive officer and president of the Federal Reserve Bank of Kansas City, recently noted that the current agriculture downturn has small bankers on notice.)

More broadly, Kauffman and Clark noted that, “Consistent with recent trends, respondents to regional agricultural credit surveys reported further increases in demand for non-real estate farm loans…[and]…Similar to the trends in demand for non-real estate farm loans, demand for loan renewals and extensions also continued to rise.”

And with respect to land values, last weeks KC Fed report stated that, “Persistently low profit margins, increased financing needs for operating expenses and a general softening in the farm economy have continued to place downward pressure on farmland values.”

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