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Farm operating loans on the rise -- Fed

Farm loan volume jumped in the second quarter of the year, reflecting the rise in crop input costs and farmers' overall willingness to borrow to secure those inputs backed by high commodity prices and farm profits, according to a report issued recently by economists at the Federal Reserve Bank of Kansas City.

But, a closer look at the recent "Agricultural Finance Datebook" report released by Fed economists Jason Henderson, Omaha Fed branch executive, and associate economist Maria Akers, shows loan size had a lot more than usual to do with the loan volume. Though operating loans to buy fuel, fertilizer and other inputs increased in number and overall volume, larger intermediate-term loans for bigger purchases like machinery and equipment were lower than the previous quarter.

"With rising input costs, farm income expectations eased and capital spending in the farm sector cooled. As a result, loan volumes for farm machinery and equipment dropped below year-ago levels, shrinking loan portfolios at small and mid-sized agricultural banks," says Henderson. "Despite higher costs for farm inputs, profits at agricultural banks strengthened in the first quarter, tripling the rate of return at other small banks."

The slide in capital spending loan volume could be as much a function of the season than anything, Henderson adds. "capital spending in the farm sector cooled as planting season got under way, shrinking intermediate-term loan volumes at agricultural banks. Loan volumes for farm machinery and equipment plunged from a first quarter spike and were 36% below year-ago levels," he says. "Interest rates for farm machinery and equipment also reversed course and moved higher for the first time in a year, averaging 5.3%. Small and midsized agricultural banks saw their farm loan portfolios trimmed with the drop in farm machinery and equipment loans."

In all, Henderson says Fed economists found, upon surveying ag lenders around the Kansas City Federal Reserve district in the nation's midsecton, a couple of factors that pulled against one another on the way to reaching a final loan volume figure. Though the average short-term operating loan amount rose, interest rates were lower.

"The average size of short-term operating loans jumped 36% above year-ago levels due to higher costs for fuel, fertilizer and feed," Henderson says. "The cost of borrowing, however, fell as the average interest rate charged for operating loans dropped from 5.3% to 4.7%. The average maturity on operating loans held steady at just under a year."

Looking ahead, Fed economists expect loan volumes for operating loans to continue to move higher through the next few months, due mostly because of expected increases in input costs. The current trend for big-ticket financing loans will likely stay intact through the rest of this year.

"Although many producers paid for current expenses out-of-pocket during the first quarter, rising costs for fuel, fertilizer, seed and feed could strain cash positions and prompt increased borrowing in the second quarter," Henderson says. "District surveys also reported strong demand for farm machinery and equipment in the first quarter, but noted that capital spending may wane through the rest of 2011 as large equipment purchases are completed."

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