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Although Weaknesses Persist, Farmers Borrow Less Money

Farmers and ranchers are taking out fewer loans from agricultural banks and are asking for smaller amounts of money when they need cash to pay for equipment, livestock, or day-to-day expenses, said the Federal Reserve in its quarterly Agricultural Finance Databook. “Weaknesses in the sector persisted, continuing to pressure farm cash flows and agricultural credit conditions,” reports the Fed.

Ag lending slowed during the summer months of July, August, and September, the same period when the Trump administration announced operational details of its ad hoc Market Facilitation Program (MFP) and began payments. Disbursements began in late August and ran at $1 billion a week in the early days. At the end of September, payments totaled $5.2 billion, with Iowa, Illinois, Minnesota, Kansas, and Nebraska the leading states. Up to $7.25 billion was available. The Databook, released late last week, did not discuss the possible impact of the payments.

A downturn in borrowing could be interpreted as a sign of financial strength on the farm, but there are countervailing indicators. Farm debt is on the rise, interest rates on non-real estate loans are inching upward, and loan repayment rates are softening, said the Federal Reserve. Still, interest rates are below the 20-year average and loan delinquency rates remain low by historical standards.

“The primary contributor for the slowdown from sharp increases a year ago was a decline in the average size of farm operating loans,” said the Databook, based on surveys of farm bankers nationwide. Operating loans allow producers to pay bills while waiting to harvest crops or fattening livestock for slaughter.

According to the Fed surveys, the average operating loan was $47,400 during the third quarter of this year, compared with $67,310 in the spring and $64,200 in the third quarter of 2018. Banks issued 860,000 operating loans this summer, a much smaller tally than 980,000 loans last summer.

“In many regions, agricultural borrowers were impacted by flooding or other extreme weather events during the first half of the year,” said the Databook. “Impacts appeared to be most severe in the Chicago, Minneapolis, and St. Louis districts, where some form of extreme weather affected more than 50% of farm borrowers. The effects of weather in the first half of the year could continue to weigh on production prospects, yields, and credit conditions throughout 2019.”

Farmland values fell modestly this spring in the Midwest and the Northern Plains compared with spring of 2018, said the Federal Reserve. “Conversely, agricultural lenders in Oklahoma and Texas reported slight increases in farm real estate values.”

The USDA forecast net farm income, a measure of wealth, at $88 billion this year, the highest in five years, buoyed by large payments by the government and aggressive cost-cutting by producers. Economists such as David Widmar caution that this is “not a time to get comfortable” because Trump tariff payments are not guaranteed in the future and there may be increases in interest rates or the price of fuel, fertilizer, and pesticides.

The Databook is available here.

Produced with FERN, non-profit reporting on food, agriculture, and environmental health.
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