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Ag lending sector solid -- Fed

Farm prices are strong right now, and that's got farm lending volume rising, according to a new survey from the Kansas City Federal Reserve Bank.

The results of the latest survey of ag lenders in the Kansas City Fed's district shows a 1.4% rise in total ag loan volume, with non-real estate loans leading the way at 3% higher. The survey shows more farmers are making capital investments on their farms, says the Fed's Omaha Branch Executive Jason Henderson.

"Farmers continue to invest heavily in farm machinery, equipment and structures, such as grain bins, machine sheds and land improvements," he says.

That's a pretty big contrast from the trend in operating loans, the volume of which continues to trend lower in the latest Fed data, Henderson adds.

"Farm operating loan demand remained sluggish as farmers paid off operating debts and used cash to prepay input costs," he says.

Land values also continue to surge, the survey shows, and that's got more land trickling onto the market. "Demand for good quality farmland, especially irrigated acreage, remained strong with lower quality ground garnering some increased interest as prices escalated," Henderson says. "Record high land prices enticed more landowners to sell and farm real estate loan volumes pushed above year-ago levels in the first half of 2012."

All these factors have the ag lending sector in a strong position. Across the board, ag banks in the Kansas City Fed's district showed higher returns on assets and improved equity, and improved repayment rates boosted overall loan ratings.

Still, Henderson says there's reason for some ag banks to question the overall sustainability of the current trend. Some responding to the survey said though the farm sector's on solid footing now, it may be tough for the trend to keep up, especially as competition ratchets up for more of the farm investment business in the mostly bullish ag economy.

"Bankers commented on the challenges in expanding profits," Henderson says. "Sluggish operating loans were contributing to relatively low loan-to-deposit ratios at agricultural banks. Competition for qualified farm loans intensified among commercial banks, Farm Credit associations and vendor financiers. Bankers reported low interest rates and shorter maturities on farm loans, especially at larger commercial banks that utilized more floating interest rate loans and more commitments."

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