More Farmers Locking in Interest Rates as Loan Volume Climbs -- Fed

The continued erosion of grain prices has farm loans on the rise again in the nation's midsection, according to a report released Wednesday by the Federal Reserve Bank of Kansas City. Despite that fact, bank officials say they don't expect overall credit conditions to fall much in the near term, but continued stagnation in farm incomes could change that in the longer term.

"As profit margins on farms tightened, producers borrowed more and reduced capital spending in late 2014 and early 2015. However, farm income has yet to fall below long-term historical averages, and recent data have shown only minimal declines in credit conditions. Relatively strong credit conditions have been partially supported by extraordinary profits among crop producers the last several years and, more recently, record profits for cow/calf producers," says Kansas City Fed Omaha Branch Executive Nathan Kauffman. "If the declining trend in farm income persists, however, agricultural credit conditions could weaken more noticeably in the future."

Overall, loan volume increased based on tighter profit margins and elevated input costs that continued to put a squeeze on short-term financing. Farmers are still repaying those loans at a healthy clip, though repayment in general has suffered slightly, and loan delinquency has bumped higher. Overall, a survey of ag lenders in the Kansas City Fed region in the nation's center shows that non-real estate loans increased by just over $8 billion in the first quarter of this year to just shy of $115 billion. Two years ago, that number was under $90 billion.

"Overall, growth in loan volume was driven by increased borrowing for current operating expenses and livestock purchases. Current operating loan volumes grew for the third year in a row following several quarters of depressed crop prices," Kauffman says. "Demand for operating loans could remain elevated as futures markets for fall crops show prices are expected to remain low due to the possibility of another record harvest."

While profits have been healthier on the cattle side, margins there are starting to fuel more loan volume in that sector in the last quarter as prices moderate and the overall herd expands. There's not quite as much momentum in the rise in cattle operating loans, however; in fact, those numbers could moderate again soon.

"Livestock loan volumes increased in the first quarter of 2015 as profit margins in the cattle sector reacted to another quarter of strong prices for feeder cattle. Profit margins tightened for feedlot operators, while cow/calf producers experienced better margins due to high cattle prices and low feed costs. Lending for feeder livestock increased more than 20% as producers rebuilt their herds, and feedlot operators dealt with increasing costs," Kauffman says. 

"Following several years of herd liquidation in 2014, cattle operations switched from liquidation to expansion, and the U.S. cattle herd grew by 2.1%," he explains. "As cattle inventories rebounded slightly, feeder cattle prices softened in the first quarter of 2015 but remained historically high. High feeder cattle prices continued to sustain livestock loan volumes, but they could moderate."

A notable finding in the Kansas City Fed's latest audit of farm credit conditions could be a foreshadowing of rising interest rates. The number of loans financed with fixed interest rates continued its steady two-year climb in the first quarter of this year. Though it may not signal higher rates just yet, it's a sign that more farmers are poised for that bounceback when it does eventually happen.

"Although farm-sector lending has continued to rise, the share of farm loans made with fixed interest rates increased notably in the first quarter of 2015. Between the first quarters of 2013 and 2015, the share of all non-real estate farm loans with fixed interest rates rose from 26% to 40%, respectively. This shift from floating to fixed interest rates was most pronounced for livestock loans, excluding feeder livestock, and farm machinery and equipment loans," Kauffman says. "Interest rates on non-real estate farm loans increased modestly in the first quarter of 2015, after declining steadily since 2007, and this uptick could have prompted more farmers to further lock in at historically low rates."

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