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Farm loan volume following profits higher
Ag lenders have a lot more loans on the books right now than they did a year ago, according to new information from the Federal Reserve Bank of Kansas City.
Loan portfolios grew by about a third at small and mid-sized ag banks in the last year, while larger lenders saw volume grow by about 20%, according to Jason Henderson, Federal Reserve Omaha Branch Executive.
"Though loan volumes rose at both large and small agricultural lenders in the first quarter, the composition of their farm loan portfolios varied. Large banks made more intermediate-term loans that were typically rated as moderate risk," Henderson says. "Small and mid-sized banks had a larger share of short-term operating and livestock loans that were generally rated as low risk. However, small and mid-size lenders also had a higher concentration of long-term farm real estate loans in their farm loan portfolios compared with large lenders, heightening their exposure to a potential correction in the farmland market."
In all, for the first quarter of 2012, large ag lenders reported 37% of total loan volume was for operating expenses versus 44% in that category at small and mid-sized ag banks.
The return on the assets in ag banks yielded the highest returns in a long time. With rising farm incomes, farmers have been paying down more debt, and there's been a decline in delinquency rates. "Bankers reported plenty of funds were available for farm loans at historically low interest rates," Henderson says.
Specifically, the livestock sector created higher short-term loan volume as more producers sought capital to build up cattle numbers in the face of low herd inventory and high prices. And, that bump in volume took livestock loan interest rates higher with it.
"High feeder livestock prices boosted the volume of short-term loans made to the livestock sector in the first quarter. A steady decline in cow inventories limited supplies and supported higher prices for feeder cattle. With strong demand for meat, particularly from foreign markets, livestock feeders borrowed to maintain production levels," Henderson says. "In fact, the average size of feeder livestock loans rose above $100,000 three out of the last four quarters. Average effective interest rates on feeder livestock loans increased to 5.2% in the first quarter."
Though the lending picture's changed a bit in the cattle sector, one thing that hasn't changed is the trend in farm land values. They continue to shoot higher, and ag lenders in the Kansas City Fed district say that's causing more land inventory on the market. But, despite value gains of up to almost 38% year-over-year, demand is still having no problem keeping up.
"Bankers in the Kansas City District noted more farmland on the market compared with last year as record values enticed some landowners to sell. Still, robust demand for farmland, especially from farmers, drove prices higher," Henderson says. "In fact, some bankers in the Chicago, Kansas City and Richmond Districts expected the upward trend in farmland values would continue into 2012."