The number of non-real estate farm loans may be increasing, but delinquencies on farm production loans are actually on the decline, according to the latest Kansas City Federal Reserve Ag Finance Databook.
The report, prepared by Assistant Vice President and Omaha Branch Executive Nathan Kauffman, Economist Cortney Cowley and Assistant Economist Matt Clark, suggests that demand for short-term financing on farms is being driven by lower incomes.
Authors say the Survey of Terms of Bank Lending to Farmers showed banks originated $88 billion in non-real estate loans to farmers, the highest volume originated in the third quarter since 1997, after adjusting for inflation.
Loans used to pay current operating expenses increased 24% from the same quarter a year ago, and operating loans also were about half the volume of all non-real estate farm loans at commercial banks in the third quarter.
Recently, loans for more than $100,000 have expanded more rapidly. In 2015, both the number and size of loans has increased, raising concerns about liquidity in the farm sector.
One gauge of liquidity, the authors say, is the ratio of operating loan volumes to U.S. net farm income. In 2015, this ratio has reached a level last seen in the mid-1980s, suggesting the farm sector, and the commercial banks that lend to the farm sector, are more exposed to short-term debt obligations and cash flow difficulties than in recent years.
Yet, low interest rates are helping to mitigate some concerns about repayment capacity.
Compared with last year, the share of non-real estate farm loans with an interest rate less than 3% has expanded in 2015, while the number of loans made with higher interest rates has continued to decline.
In contrast to the 1980s, authors say low interest rates on farm operating loans may continue to be an important factor in servicing short-term debt obligations.
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More debt, but better repayment records
In the second quarter, total farm sector debt outstanding at commercial banks was $156 billion, up 9.5% from the previous year. The increase marked the fourth consecutive year of rising second quarter farm sector debt at commercial banks, authors write.
"Despite potential concerns of increasing debt, banks have generally not reported significant problems with delinquencies," they note. "In fact, the share of farm production loans 30 to 89 days past due (still accruing interest) was 0.40% in the second quarter, down from 0.44% in 2014."
The share of farm production loans 90 or more days past due and no longer accruing interest fell to 0.5% in the second quarter from 0.6% and 0.8% in 2014 and 2013, respectively.
Regional ag finance data
The Federal Reserve Banks of Chicago, Dallas, Kansas City, Minneapolis and St. Louis collectively reported significant increases in loan demand in their respective districts. More specifically, second quarter regional data from Agricultural Credit Surveys showed these districts reported increased demand for non-real estate farm loans.
This was the first time since 2008 that each of the districts reported increased demand for non-real estate farm loans in the second quarter, authors add.
Second quarter data also showed increases in loan renewals and extensions in these five Federal Districts.
As with loan demand, this was the first time since 2012 that each of these districts reported increased demand for renewals and extensions in the second quarter. Prior to 2012, the last time these districts reported a simultaneous increase in renewals and extensions was the second quarter of 2009. Increased demand for loan renewals and extensions coincided with weaker repayment rates in each of these districts except Dallas.
Land values, meanwhile, have been mixed. Nonirrigated cropland values in the second quarter declined modestly in Federal Reserve Districts throughout the Corn Belt.
Cropland values continued to decrease most significantly in states with higher concentrations of crop production, such as Minnesota and Iowa. Conversely, land values increased slightly in states relatively more concentrated in livestock production, such as Oklahoma, Texas, Wyoming and Colorado.
Read the full Ag Finance Databook report, "Short-Term Financing Needs Still Rising."