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Farm Operating Loans on the Rise -- Fed

The switch has been flipped.

A couple of years ago, farm lending for big-ticket purchases -- fueled by high grain prices and farm incomes -- was strong while operating loans were scraping the floor. Corn and soybean farmers were making a lot of money and turning around and reinvesting it in their businesses through capital purchases.

Now, the opposite is true. "The total volume of non-real estate farm loans rose significantly compared with the same period in 2013," says Nathan Kauffman, Omaha Branch Executive for the Federal Reserve Bank of Kansas City, referencing fourth-quarter 2014 loan volume in a recent Fed report. "Most of the gains were driven by increased borrowing for current operating expenses. In 2014, a large U.S. corn and soybean harvest placed downward pressure on prices and limited cash receipts for fall crop sales. With production expenses holding at high levels, reduced farm income increased the need for financing to pay for next year’s crop inputs. Despite a slight rebound in crop prices from the October low, corn and soybean prices have remained significantly below those of recent years."

That's not true for all farmers, though. It's no surprise that cattle farmers are having a year for the record books, and that's reflected in the latest quarterly data from the KC Fed. The cow/calf sector is booming, and that's putting a squeeze on feeders to keep up with demand, hence a jump in feeder cattle loans, according to the Fed. "Looking ahead, the supply of feeder cattle may contract further if a reduction in calf slaughter signals that more animals are being retained to rebuild herds," Kauffman says.

Despite the downturn in overall loan volume -- which was sharper still for medium-term loans for bigger-ticket items like machinery -- the performance of the ag loans out there didn't hurt much. In fact, improved loan performance underpinned overall better ag bank performance in general. In other words, though the bills are higher than the revenue in most cases right now, farmers are still getting the job done and keeping everyone paid, with just a few exceptions.

"Improved farm sector loan performance supported a slight rise in profits at agricultural banks. At the end of the third quarter, the return on assets at banks with an above-average percent of loans made to the agricultural sector edged up from year-ago levels. Delinquency rates on both farm real estate and non-real estate loans moved lower and net charge-offs as a share of total loans also declined. In addition, the average capital ratio at agricultural banks improved from last quarter and last year," Kauffman says. "Agricultural bankers reported only a modest deterioration in credit conditions despite a drop in farm income in the third quarter of 2014. Reduced profitability for crop producers in the Chicago, St. Louis, Minneapolis, and Kansas City Districts was driving increased demand for operating loans and a decline in loan repayment rates as well as more requests for loan renewals and extensions. Still, survey respondents in all reporting Federal Reserve Districts indicated funds were available for farm loans but noted a slight rise in collateral requirements."

The slight tipback in loan repayment rates overall is nothing to worry about yet; the ag lending sector remains on solid footing, Kauffman says. However, where ag credit goes in the next year will depend a lot on which direction both grain and livestock prices move soon.

"After narrowing in 2014, the direction of farm sector profit margins in 2015 will be a key factor in determining whether agricultural credit conditions improve or worsen in the coming year," Kauffman says.

 

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