Report shows decline in equipment purchase loans.
After dipping three quarters ago, farm lending activity picked up in the third quarter to a level similar to a year ago, according to the latest Federal Reserve Ag Finance Databook.
The recent stabilization in lending activity may suggest that borrowers and lenders have made some adjustments alongside reduced profit margins and spending that have persisted for several years. Although farm lending appeared to stabilize in the third quarter, liquidity remains a concern for some borrowers and also for some lenders. Some borrowers may find it increasingly difficult to obtain credit amid low profits. Meanwhile, rising loan-to-deposit ratios at many agricultural banks also may induce more caution in the months ahead.
8 takeaways from the report:
The volume of non-real estate farm loans originated in the third quarter increased about 2% from the previous year.
The volume of loans used to pay for current operating expenses increased 15% from the previous year, whereas the volume of loans used to finance livestock and equipment purchases declined.
Operating loans have accounted for nearly 60% of the total volume of non-real estate farm loans over the past four quarters, the highest in the 40-year survey history. Conversely, the share of other loans has fallen to levels last seen in the early 1990s.
Interest rates on loans used to finance operating expenses, farm machinery, feeder livestock and other livestock have increased about 50 to 75 basis points from the previous year.
The average maturity on loans used for operating expenses over the past four quarters has declined 4% from the previous year, but the duration has remained one of the highest in survey history at 12 months. Similarly, maturities for livestock and farm machinery loans have declined in recent quarters; despite the decline, maturities were both higher than the previous year and historically high.
Bankers have raised the risk ratings slightly on new non-real estate farm loans. In the third quarter, the share of non-real estate farm loans classified as special mention increased 4% from the previous year and the share of loans classified as minimal risk declined 2%. Still, nearly 90% of farm loans still were assigned a rating of “acceptable” or better in the third quarter, suggesting that financial conditions have only deteriorated modestly.
The average loan-to-deposit ratio at agricultural banks has increased from 71% in 2012 to 81% in 2017. Loan-to-deposit ratios at highly concentrated agricultural banks (those with a ratio of agricultural loans to risk-based capital of at least 300%), have increased to more than 90%.
Agricultural banks have continued to outperform small nonagricultural banks.
Source: Federal Reserve Bank of Kansas City