Farmers feel less need to borrow money from the bank
The strong agricultural economy, fueled by high commodity prices, has reduced farmers’ reliance on farm lenders, despite concerns about rising input costs, according to a Federal Reserve survey of ag bankers. “Higher costs are likely to put upward pressure on demand for credit, but strong farm income and working capital could also supplement financing for some borrowers,” said a Kansas City Federal Reserve Bank summary on Thursday.
Overall, banks advanced a smaller amount of money in non-real estate loans during the fourth quarter of 2021 than in the same period of 2020, said the Kansas City Fed. The average volume of non-real estate loans in the past 12 months reached a nearly 10-year low, with farm operating loans driving most of the decline.
Non-real estate loans cover an array of expenses, from livestock to farm equipment, and operating loans cover the day-to-day costs of crop and livestock production. The nationwide survey of farm bankers found that the average size of a non-real estate loan, roughly $83,000, was more than 20% smaller in October, November, and December 2021 than in the fourth quarter of 2020. Operating loans, at an average of $55,500, were more than 30% smaller.
“Broadly, conditions in the agricultural economy remained strong through 2021 and continued to support farm finances,” said the Kansas City Fed. “Despite intensifying concerns about rising input costs impacting farmer returns in the coming year, commodity prices remained elevated and supported profit opportunities through the end of the year.”
The USDA estimated net farm income, a broad measure of profits, at $116.8 billion in 2021, the highest since 2013 and aided by $27 billion in direct federal payments. Analysts expect farm income to decline this year because of rising production costs, a softening of commodity prices, and the expiration of pandemic relief programs.
“Overall, the agricultural credit market is riding several positive trends into 2022,” wrote Purdue economists Brady Brewer and Todd Kuethe in an outlook on agricultural credit this year. Low interest rates and rising land values in 2021 improved farm balance sheets.
“Over the past several years, there have been high levels of uncertainty in the agricultural commodity markets due to the COVID-19 pandemic, political disputes, and supply chain issues,” wrote Brewer and Kuethe. “While these are expected to continue at least in the near future, the agricultural credit sector does not have as many concerns.”