Personal Finance

Short-term financing needs rising

Non-real estate farm loan volumes at commercial banks continued to increase sharply in the third quarter. Data from the Survey of Terms of Bank Lending to Farmers showed banks originated $88 billion in non-real estate loans to farmers, the highest volume originated in the third quarter since 1997, after adjusting for inflation.

Loans used to pay current operating expenses increased 24 percent from the same quarter a year ago, and continued to drive the overall increase in non-real estate farm lending. Similar to recent trends, operating loans also were about half the volume of all non-real estate farm loans at commercial banks in the third quarter.

Consistent increases in the number and average size of non-real estate farm loans also continued to boost lending activity in the farm sector. Historically, small loans have contributed significantly to non-real estate farm lending at commercial banks. Recently, however, loans for more than $100,000 have expanded more rapidly. In 2015, both the number and size of loans has increased, and the increasing volume of larger loans has driven general increases in overall loan volumes.

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Large, ongoing increases in operating loan volumes have raised concerns about liquidity in the farm sector. The increase in operating loan volumes in the past two years has coincided with a period of declining farm incomes.

One gauge of liquidity, then, or a general ability to service short-term debt obligations, is the ratio of operating loan volumes to U.S. net farm income. In 2015, this ratio has reached a level last seen in the mid-1980s, suggesting the farm sector, and the commercial banks that lend to the farm sector, are more exposed to short-term debt obligations and cash flow difficulties than in recent years. …

The Federal Reserve Banks of Chicago, Dallas, Kansas City, Minneapolis and St. Louis (regions with traditional concentrations of agricultural) reported significant increases in loan demand in their respective districts. More specifically, second-quarter regional data from Agricultural Credit Surveys showed these districts reported increased demand for non-real estate farm loans. This was the first time since 2008 that each of the districts reported increased demand for non-real estate farm loans in the second quarter.

Second-quarter data also showed increases in loan renewals and extensions in these five federal districts. As with loan demand, this was the first time since 2012 that each of these districts reported increased demand for renewals and extensions in the second quarter. Prior to 2012, the last time these districts reported a simultaneous increase in renewals and extensions was the second quarter of 2009. Increased demand for loan renewals and extensions coincided with weaker repayment rates in each of these districts except Dallas.

Land values, meanwhile, have been mixed. Nonirrigated cropland values in the second quarter declined modestly in Federal Reserve Districts throughout the Corn Belt. Cropland values continued to decrease most significantly in states with higher concentrations of crop production, such as Minnesota and Iowa. Conversely, land values increased slightly in states relatively more concentrated in livestock production, such as Oklahoma, Texas, Wyoming and Colorado. …

High loan-to-deposit ratios and returns on assets typically are good indicators of bank profitability. However, increased lending activity has raised concerns about future repayment capacity in the face of declining farm incomes.

If a period of low farm income continues, some agricultural producers may be forced to use working capital more quickly to meet increasing debt obligations. If recent trends continue, further deterioration of working capital may, therefore, adversely affect agricultural lending institutions’ profitability.

At the Federal Reserve Bank of Kansas City, Nathan Kauffman is assistant vice president and Omaha branch executive; Cortney Cowley is an economist and Matt Clark is an assistant economist. These comments are from the bank’s Ag Finance Databook.

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