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Increasing operating loan volume, interest rates raise alarm

View from the Hill: Increases in operating loan volume could warn of a looming economic crisis.

Paul Penner

February 4, 2019

3 Min Read
man on laptop in field
CONCERN RISING: A combination of increasing operating loans, a steady uptick in interest rates and market uncertainty cause increased concern about financial hard times for the nation’s farmers.valentinrusanov/gettyimages

“As rates tick up, growth in operating loans boosts farm lending.”

This was the title of an article co-written by Nathan Kauffman and Ty Kreitman, vice president and assistant economist of the Kansas City branch of the Federal Reserve Bank. respectively. It can be read in its entirety online.

Increases in operating loan volume may be likened to a “shot across the bow” warning us of an economic crisis looming on the horizon.

Additional clues either add support to the direction and nature of the crisis, or they may indicate the road ahead may not be as bad as it seems. Consider these numbers:

• Total non-real estate farm loans are up nearly 8% over one year ago.

• Total non-real estate farm loans have risen for seven consecutive quarters, with an average growth rate in 2018 of about 12%.

• Non-real estate farm loan volumes at the largest agricultural banks with portfolios of more than $25 million were up about 16% from the fourth quarter of 2017.

• Non-real estate lending volume at banks with portfolios less than $25 million was down 15%.

• The volume of operating loans reached a historical high for the fourth quarter, over $10 billion, or 22% year over year, increasing an average of 12% over the last eight quarters.

• Loans to finance farm machinery almost doubled from the fourth quarter of 2017.

• The volume of all loans for other purposes declined over the same period.

• Meanwhile, interest rates are rising, with the bulk of rates for non-real estate loans hovering in the 4.9% to 6.9% range. Comparatively, 2015 rates were primarily in the less than 4% to 5.9% range.

Looking ahead, depending on the speed of interest rate changes and other external market forces which influence revenues and costs, agriculture is entering potentially troubling times.

Total farm debt at commercial banks is on a steady uptrend. Since the year 2000, debt has increased from just under $100 billion to almost $175 billion in 2018. Delinquencies are trending slightly upwards while farm bankruptcies have declined in 2018, reversing a rising trend which began in 2014. Perhaps it is an anomaly. Only time will tell.

A few takeaways are these:

• Farm size continues to grow, even in difficult times. This pushes loan volumes higher, which requires larger banks to service lending requirements. Smaller banks experience a decline in volume as well.

• That said, large farms are not immune to the dangers ahead. When one of the “big boys” declares bankruptcy, everyone knows about it. Plus, the impact on a lender’s liquidity declines dramatically when just one of these folks goes down.

• Smaller farms are an eclectic group. Some are well financed with off-farm income sources. Some of these farms are adept at learning how to survive and even make a living using niche markets to sell food and goods to urban consumers. Others continue to struggle with paying the bills and may not survive the next downturn.

• Controlling operating costs is paramount in not only achieving long term profitability, but also surviving any economic downturn. Cash is king. Maintain working capital. Know your cost of production. Cut costs without sacrificing efficient production. Establish and use a marketing plan. Use a disciplined strategy for upgrading assets, to limit impulse buying.

With continued uncertainty in export markets and slow movement in fashioning new trade agreements, this year could well be one where a win is surviving the unexpected. We plan and strive for more, but even when we do all the right things, the outcome is not guaranteed.

That said, at this time of year, farmers are eternal optimists. Spring is but a heartbeat away. The wheat crop is breaking dormancy soon. Preparations are underway to ready machinery and resources to begin the planting season in earnest. Spring crops will go in the ground, and livestock will continue to grow and flourish.

Penner is a Marion County farmer and past president of the National Association of Wheat Growers. His email is [email protected].

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