Farm loans surge; sector still strong -- Fed
A combination of high input costs for crop farmers, high feed costs for livestock farmers and the rush to cash in before year-end accelerated depreciation tax espiration led to sky-high farm lending volume in the 4th quarter of calendar-year 2012, according to a report released this week by Kansas City Federal Reserve Bank Omaha branch executive Jason Henderson.
Farm real estate loans rose 3%, while non-real estate loans were 5% higher than a year ago. Overall outstanding farm debt outstanding was 4% higher than a year ago, but deposits rose in line with loan volumes, and that "kept the average loan-to-deposit ratio and agricultural banks near historic lows," Henderson says.
"Loan volumes for feeder livestock rose further as prices for feeder livestock remained high due to short supplies resulting from past herd liquidations. Current operating loans to livestock producers also remained high with elevated feed costs," Henderson says. "In addition, rising fertilizer and seed prices enticed some crop producers to pre-pay for 2013 inputs, which boosted current operating loan volumes even higher."
Despite the surge in loan volume, Henderson's report shows it's not a sign of a lagging ag economy. The fourth quarter saw growth in the factors underpinning farm profits, from grain prices to the crop insurance indemnity guarantees those prices created. Land values remained on their meteoric rise from New Mexico to Minnesota. But, operating capital constraints did grow out of the drought that hit many farmers, and keeping out of the red required more loan volume; that increase hasn't caused a change in the distance to which farmers are financially leveraged.
"Bankers reported that farm lending varied with the severity of the drought. In the Kansas City and Dallas Districts, severe drought raised feed costs for livestock operators and trimmed farm incomes but spurred operating loan demand for feed," Henderson says. "In contrast, rising incomes in the Minneapolis and San Francisco Districts dampened operating loan demand but boosted farm capital spending. Demand for dairy loans remained stable in the Chicago and Dallas Districts while demand for feeder cattle loans was expected to weaken. Richmond anticipated rising loan volumes driven by feeder cattle, operating and farm machinery loans."