Ag Lending Trends: The Money Squeeze Continues

After appearing to stabilize, farmer demand for agricultural loans increased sharply in the fourth quarter of 2017. Even though farm income has halted its rapid decline, farmers will likely continue to face tight profit margins this year as their loan obligations grow.

“Large loans drove the increase in farm lending, which may heighten concerns about cash flow in 2018 as interest rates have continued to rise steadily. At the same time, farm income has stabilized somewhat, but at a low level,” report Cortney Cowley and John McCoy, Federal Reserve Bank of Kansas City, in the February 2018 release of the
Ag Finance Databook.

Farm lending at commercial banks increased in the fourth quarter of 2017. Demand for all types of loans, minus farm machinery and equipment, were significantly higher than a year ago. The total value of operating loans and livestock loans increased almost 50% from the fourth quarter of 2016 but was still below 2014 and 2015 levels.

Loans over $100,000 make up more than 70% of total farm loan volumes at commercial banks. Farm operating loans also continue to increase in size. After declining in 2016, the average size of farm operating loans grew in every quarter of 2017. In the fourth quarter of 2017, the average size of farm operating loans nearly matched the previous peak in the fourth quarter of 2015.

These larger loans are coupled with higher interest rates. Interest rates on all types of farm loans increased in the fourth quarter. Rates for operating loans increased nearly a full percentage point in 2017 compared to a year ago. Also in 2017, more loans were issued with interest rates greater than 6% than loans with rates of 3% or less. This is the first time this has occurred since 2014.

Positive Indicators. Even with producers needing more financing, farm loan delinquencies and nonperforming loans have remained low. However, liquidity at agricultural banks continues to tighten, Cowley and McCoy say.

Farmland values have remained stable in the country’s midsection, regardless of these tightening credit conditions for farmers. In the Corn Belt and southern Plains states, farmland values increased slightly or remained steady compared with a year ago. In the mid- to upper-Plains states, values declined slightly.

Despite the financial headwinds, the combination of low delinquency rates and the strength in farmland values are supporting farm sector balance sheets as spring planting decisions approach, Cowley and McCoy report.