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Small Ag Banks Mitigate the Risk of Rising Demand for Farm Loans

In an indirect sign of stress in the farm sector, small agricultural banks are making adjustments, such as syndicating loans and charging higher interest rates, to offset risk in the face of high demand for farm loans, said the Federal Reserve in its quarterly Ag Finance Databook. The Fed’s Beige Book, meanwhile, said spring floods in the northern Plains and western Corn Belt could put an additional burden on a farm sector coping with low commodity prices.

“Despite a slight decline in the total number of loans reported by agricultural bankers, farm lending continued to increase in the first quarter of 2019. The growth in loan volumes was due primarily to additional increases in the average size of loans to farmers,” said the Ag Finance Databook. The average loan was $85,510 from January-March, compared with $80,090 during the first three months of 2018. “Alongside larger loans and higher loan volumes, small agricultural banks have made adjustments to meet strong demand from farm borrowers and to mitigate risks associated with lending in a low-income environment.”

Small farm banks syndicated or brought other institutions into 40% of their loans in early 2019, compared to 10% in 2012 during the the commodity boom. The small ag banks also are seeking USDA loan guarantees on a growing portion of their loans. “Increased levels of loan guarantees and (loan) participations at small agricultural banks relative to all banks could be an indication of elevated financial stress in the farm sector,” said the Federal Reserve. It defines small ag banks as having less than $500 million in assets and more than 15% of its loan portfolio in agricultural production and real estate loans.

Interest rates on nonreal estate loans, which cover everything from buying livestock and purchasing farm equipment to paying operating expenses, edged higher this year, to an average 5.5%, said the Databook. Rates were nearly 1 point higher, 6%, at small banks than at large ag banks. A year ago, the average rate was 4.7%.

In the April edition of the Beige Book, the Minneapolis Federal Reserve Bank said agricultural conditions “remained weak. In South Dakota and southern Minnesota, where flooding was most severe, the impact could be considerable.” The Chicago Federal Reserve Bank said farmers in the central Midwest “continued to be challenged by low corn and soybean prices” and many have decided “to continue to hold on to crops from last year’s harvest and to delay entering into contracts for this year’s harvest” in hopes the Sino-U.S. trade war will end and grain prices will rise.

The regional Fed banks in Chicago, St. Louis, and Kansas City mentioned farmer concern about flooding this spring and the potential impact on yields for this year’s crop is fieldwork is delayed by a late spring. “Although the total impacts of the floods remained unknown as recovery ensues, conditions could put additional stress on some farm operations in the coming months,” said the Kansas City Fed.

Despite stagnant farm income and rising farm debt, delinquency rates on farm loans “remained low from a historical perspective,” said the Databook. Delinquencies ticked above 2% during 2018. Farmland values generally have remained stable, “providing ongoing support to the farm sector.”

Produced with FERN, non-profit reporting on food, agriculture, and environmental health.
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