Insights into the State of the Ag Economy- Kansas City Federal Reserve Report

The Federal Reserve Bank of Kansas City indicated in a report this week (“Farm Lending Declines, But Remains Elevated“) that, “Farm lending at commercial banks declined in the third quarter of 2016, but remained elevated as lenders continued to assess the downturn in the U.S. agricultural economy. The need for short-term financing in the farm sector remained high as profit margins remained weak. Alongside growing risk in the sector and slight declines in loan performance, agricultural bankers made additional adjustments to loan terms and continued to rely more heavily on farm real estate as collateral. Farmland values continued to decline at a modest pace, which may put further pressure on agricultural credit conditions for some borrowers.”

The Fed report noted that, “[T]he volume of other non-real estate farm loans, which are loans used for a variety of farm purposes, dropped sharply in the third quarter. This decrease may reflect other cutbacks farmers may have made during a time of tight profit margins.”

“Lenders also further adjusted loan terms as profit margins in the agricultural sector generally remained weak,” the Fed report said.

With respect to farmland values, the Fed report stated that, “The weak farm economy and downbeat credit environment across Federal Reserve districts also continued to affect farmland values. Responses to Federal Reserve surveys indicate cropland values declined in most states in the second quarter (Map). Although values of nonirrigated cropland have continued to rise in the Dallas District, the Kansas City, Minneapolis and Chicago districts have recorded declines, or no change, in the value of nonirrigated cropland each quarter since 2015.”

Graph From Federal Reserve Bank of Kansas City

And yesterday’s update added that, “The need for agricultural financing generally remained high in the third quarter despite a modest decline in farm loan volumes. Banks continued to meet financing needs, and manage risk stemming from gradual deterioration in the U.S. agricultural economy, by making modest adjustments to loan terms. However, if weak profit margins persist, loan performance continues to deteriorate, and farmland values continue to decline, agricultural banks may face greater challenges to manage the risk associated with lending in agriculture.”

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