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Farm loans getting cheaper -- Fed

Riding continued strong profit margins through the the midpoint of 2013, more farmers took on more debt, causing tighter competition among ag lenders that found larger banks coming out with a larger share of that growing business, according to new information from the Federal Reserve Bank of Kansas City.

A survey of farm lenders conducted by Fed economist Nathan Kauffman shows that larger banks took on more of the 5.8% higher non-real estate farm loans in the second quarter of 2013.

"Rising production costs prompted some agricultural producers to take on more debt, and lenders continued to compete for market share. The shift to borrowing from larger lenders could be due, in part, to attractive and flexible loan terms," Kauffman says. "Typically, larger banks offered more floating interest rate loans at lower rates than small and midsize lenders, suggesting larger banks may be better able to accommodate the borrowing needs of large producers expanding their operations."

The increased volume of farm loans, as well as repayment of those loans, reflects recent profitability but also continued high input costs to raise a crop, Kauffman says. A combination of anticipated lower grain prices and the lure of lower interest rates helped push more of this loan volume to larger lenders.

"As farm spending ramped up to pay high input costs for seed, fertilizer, and feed, loan volumes for farm machinery and equipment fell sharply. Looking ahead, an anticipated drop in crop prices closer to harvest could further strain farm profit margins, potentially boosting the need for short-term loans and curtailing farm capital spending at year-end," Kauffman says. "Almost 90% of non-real estate loans at large lenders were made with floating interest rates, double the percentage at small and midsize banks. Moreover, the average effective interest rate offered by large banks on non-real estate loans was 3.6%, much lower than the average 5.4% effective interest rate at small and midsize banks."

Though more farmers are seeking loans for operating costs and real estate loans (operating expense loans are 5.3% higher in the Kansas City Fed district, while real estate loans are 2% higher), it's less of a reflection on current soft loan demand and more a function of the difference in the general profit outlook moving into fall compared to a year ago, Kauffman says.

"Following a year-end spike in capital spending, the volume of loans for farm machinery and equipment tumbled by almost a third in the second quarter from last year. Agricultural lenders also extended a substantial amount of intermediate-term credit for other, general purposes, adding to farm sector debt obligations," he says. "Demand for farm loans remained relatively soft, particularly at community banks, according to Federal Reserve District surveys in the first quarter. Looking forward, bankers in the Chicago, Dallas, and Richmond Districts did not anticipate much loan growth during the next three months."

The good news for farmers moving forward is it's likely going to remain fairly easy to borrow money, whether for land, machinery, or operating costs, Kauffman says. Collateral needs remain low in the Midwest, and while that's not the best thing for ag lenders themselves, they will likely combine with lower interest rates to make money easier to secure to keep farm operations financed in the next few months.

"Farm credit conditions remained strong in the first quarter. According to Federal Reserve surveys, farm loan repayment rates remained high in all Districts and loan renewals and extensions generally held at low levels. With slack loan demand, ample funds were available for qualified farm borrowers," Kauffman says. "In fact, most agricultural bankers in the Chicago, Dallas, and Richmond Districts classified loan-to-deposit ratios as lower than desired. Collateral requirements for non-real estate farm loans eased slightly in most Districts except Dallas, Richmond, and San Francisco, where they held steady. Meanwhile, heated competition for high-quality farm loans pushed interest rates down further for short-term feeder cattle and operating loans, intermediate-term non-real estate loans, and long-term real estate loans."

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