urther declines in interest rates on farm loans at

commercial banks helped sustain farm lending during the

third quarter. The average effective interest rate on both real

estate and non-real estate farm loans edged down between

the May and August Survey of Terms of Bank Lending

to Farmers. In contrast, a rise in interest rates on U.S.

Treasury securities in June placed

upward pressure on interest rates

commercial banks charge for

nonfarm loans. However, heated

competition among lenders, a

strong farm economy and solid

loan repayment rates contributed

to lower interest rates on farm

loans during the third quarter. In

addition, commercial banks were typically offering longer

maturities on non-real estate farm loans, particularly for

loan categories in which volumes had declined, such as farm

machinery and equipment.

Agricultural loan volumes at commercial banks

returned to the previous year’s levels during the third

quarter after rising in the spring. According to national

survey data collected during the first full week of August,

both real estate and non-real estate farm loan volumes

held relatively steady when compared with last year. Rising

farmland values supported farm real estate financing

while high production costs bolstered demand for farm

operating loans. An uptick in other non-real estate loans

for unspecified purposes helped mitigate a dip in loans for

livestock and farm machinery

and equipment.

Agricultural banks reported

improved profits and stronger

capital positions at midyear.

The return on assets at

agricultural banks during the

second quarter exceeded year-

ago levels while the returns at

other small banks were little changed. Delinquency rates

on both real estate and non-real estate loans fell further,

particularly at large commercial banks. Average capital

ratios strengthened at agricultural banks though loan-

to-deposit ratios remained historically low. Agricultural

bankers indicated ample funds were available to satisfy a

potential increase in farm borrowing if falling crop prices

reduce this year’s farm income.

F e d e r a l R e s e r v e B a n k o f K a n s a s C i t yS e p t e m b e r 2 0 1 0 F e d e r a l R e s e r v e B a n k o f K a n s a s C i t yO c t o b e r 2 0 1 3

AgriculturalNATIONAL TRENDS IN FARM LENDING

Finance Databook

Lower Farm Loan Rates Help Sustain Lendingby Nathan Kauffman, Omaha branch executive

Maria Akers, associate economist

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F

“…heated competition among lenders, a strong farm economy and solid loan repayment rates

contributed to lower interest rates on farm loans…”

Agricultural Finance DatabookF e d e r a l R e s e r v e B a n k o f K a n s a s C i t yO c t o b e r 2 0 1 3

2w w w. k a n s a s c i t y f e d . o r g / r e s e a r c h / i n d i c a t o r s d a t a

Chart 2: Non-Real Estate Farm Loan Volumes by Purpose

Chart 1: Average Effective Interest Rates on Farm Loans

Source: Agricultural Finance Databook, Table A.3.

Source: Agricultural Finance Databook, Table A.8.

Section AThird Quarter National Farm Loan Data

3

4

5

6

7

8

3

4

5

6

7

8

2008 2009 2010 2011 2012 2013

Short-Term Current Operating Expenses

Intermediate-Term Farm Machinery and Equipment

Long-Term Real Estate

Percent

After rising in the spring, non-real estate farm loan volumes held relatively steady during the third quarter as commercial banks sought to preserve market share by lowering interest rates on farm loans. Despite a rise in interest rates on U.S Treasury securities this summer that pushed interest rates higher on many types of loans, commercial banks typically lowered interest rates on loans to the farm sector. During the August survey period, the average effective interest rate on short-term current operating loans dipped to a record survey low of 4.3 percent (Chart 1). After rising in the second quarter, interest rates on intermediate-term farm machinery and equipment loans return new below 5.0 percent. Commercial banks also extended loan maturities during the third quarter.

Lower interest rates helped keep total borrowing for non-real estate farm loans during the third quarter similar to last year (Chart 2). High production costs kept loan volumes for current operating expenses at elevated levels and the volume of loans made for other, nonspecified purposes rose modestly according to August survey data. A drop in the average amount of feeder livestock loans was partially offset by higher volumes for other livestock loans. However, the volume of farm machinery and equipment loans fell for the second straight quarter as producers focused on short-term financing needs. With high production expectations dampening crop prices heading into harvest, the prospect of lower farm income could boost agricultural lending in the coming months (Chart 3).

Commercial banks also lowered interest rates on real estate loans and extended loan maturities during the third quarter. In fact, the average effective interest rate on farm real estate loans moved lower even after interest rates on conventional residential mortgage loans spiked in June. According to national agricultural loan survey data collected during the first full weeks of May and August, the average effective interest rate on farm real estate loans fell from 4.1 percent to 3.9 percent, respectively. In addition, commercial banks lengthened loan maturities. For example, the average term on farm machinery and equipment loans rose from an average of 30 months to 36 months.

Chart 3: U.S. Corn and Soybean Prices

4

6

8

10

12

14

16

18

20

2

3

4

5

6

7

8

9

10

Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14

Corn (left scale)

Soybeans (right scale)

Futures prices as of Oct. 2, 2013

Dollars per Bushel Dollars per Bushel

Sources: Commodity Research Bureau and Chicago Board of Trade.

10

20

30

40

50

60

70

All Non-Real Estate Farm

Loans

Current Operating Expenses

Feeder Livestock

Other Livestock

Farm Machinery

and Equipment

Other Non-Real Estate Loans

Q3 2011

Q3 2012

Q3 2013

Billion Dollars

F e d e r a l R e s e r v e B a n k o f K a n s a s C i t yO c t o b e r 2 0 1 3

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Agricultural Finance Databook

Chart 4: Farm Debt Outstanding at Commercial Banks

Chart 5: Delinquency Rates on Farm Real Estate Loans

Chart 6: Rate of Return on Assets (Second Quarter)

Source: Agricultural Finance Databook, Table B.1

Source: Federal Reserve Board of Governors.

Source: Agricultural Finance Databook, Table B.7.

-2

0

2

4

6

8 Percent Change from Prior Year

2009:Q1 2010:Q1 2011:Q1 2012:Q1 2013:Q1

Section BSecond Quarter Call Report Data

During the second quarter, farm lending at commercial banks surged, with loan volumes rising at the fastest rate in four years (Chart 4). A sharp increase in agricultural loan volumes from the May 2013 Survey of Terms of Bank Lending to Farmers suggested that farm sector borrowing might rise in the second quarter. Call report data as of June 30, 2013, confirmed that farm debt outstanding at all commercial banks jumped 5.7 percent from the previous year. Strong demand for farmland and rising farmland prices contributed to an 8.3 percent increase in farm real estate loan volumes. High input costs and continued losses in some livestock sectors pushed non-real estate farm loan volumes almost 3.0 percent higher compared with the second quarter of last year.

Farm loan performance at commercial banks improved further during the second quarter. After adjusting for seasonal trends, delinquency rates on farm real estate loans at the 100 largest banks dropped below 4.0 percent for the first time in four years, falling to 3.5 percent during the second quarter (Chart 5). Showing a similar trend, delinquency rates on farm real estate loans at all other commercial banks fell to just below 2.0 percent, their lowest rate since 2008. Delinquency rates also eased for non-real estate farm loans at both large and small commercial banks.

With stronger profits, agricultural banks continued to outperform their peers during the second quarter. The rate of return on assets at agricultural banks rose to 0.7 percent at the end of the second quarter, exceeding the 0.4 percent return at other small banks (Chart 6). In addition, the average rate of return on equity at agricultural banks was 6.2 percent during the second quarter compared with 3.8 percent at other small banks. With improved profitability, average capital ratios at agricultural banks rose from both last quarter and last year, while average capital ratios at other small banks declined by comparison.

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2

3

4

5

6

7

8

1

2

3

4

5

6

7

8

2000 2002 2004 2006 2008 2010 2012

Largest 100 U.S. Banks

Other Commercial Banks

Percent of Outstanding Loans, (seasonally ajusted)

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

Agricultural Banks Other Small Banks

2009

2008

2008

2010

2010

2011

2011

2012

2012

2013

2013

2009

Percent

Map 1: Value of Nonirrigated Cropland(Second Quarter, 2013)

Section CSecond Quarter Regional Agricultural Conditions

Farmland values rose further during the second quarter and were generally expected to hold at high levels. With fewer farms typically for sale during the growing season, strong demand kept prices elevated. The Northern Plains posted some of the highest year-over-year gains in nonirrigated cropland values (Map 1). Cropland values also climbed in the Corn Belt as drought conditions eased, boosting production estimates for this fall’s harvest. However, dry weather continued to stress plantings in the Western Plains and drove strong demand for irrigated cropland. In addition, high feed and forage costs spurred ranchland values higher. Still, most bankers in the Chicago, Dallas and Kansas City Federal Reserve Districts expected farmland values to plateau in the coming months.

Agricultural bankers responding to Federal Reserve surveys reported an uptick in farm loan demand during the second quarter. High input costs for both crop farmers and livestock feeders heightened the need for operating loans in the Chicago, Kansas City and Minneapolis Districts. Furthermore, an anticipated increase in U.S. crop production sent crop prices tumbling and lowered farm income expectations in the reporting Districts of Kansas City, Minneapolis and St. Louis. Looking ahead, weaker farm income may limit capital spending and lower demand for machinery and equipment loans but prompt more short-term borrowing for next year’s crop inputs.

Farm credit conditions remained solid in the second quarter. According to Federal Reserve surveys, farm loan repayment rates held above year-ago levels in all Districts and the number of loan renewals and extensions was relatively stable. Even with slightly higher loan demand, agricultural bankers reported that sufficient funds were available for approved borrowers and very few loans were referred to nonbank credit agencies. Collateral requirements for non-real estate farm loans eased slightly in the Kansas City District, held steady in the Dallas, Minneapolis and San Francisco Districts and tightened slightly in the Chicago and St. Louis Districts. Long-term interest rates on farm real estate loans edged up in the Chicago, Minneapolis, St. Louis and San Francisco Districts in the second quarter but fixed interest rates on operating loans held at low levels in all Districts.

Montana 9.1%

North Dakota25.5%

South Dakota23.0%

Nebraska14.9%

Iowa18.0%

Western Missouri25.8%

NorthernIllinois17.0%

NorthernIndiana21.0%

Oklahoma10.0%

Texas2.2%

Kansas22.2%

Minnesota23.1%

NorthernLouisiana

1.5%

SouthernWisconsin

7.0%

Mountain States*14.0%

F e d e r a l R e s e r v e B a n k o f K a n s a s C i t yO c t o b e r 2 0 1 3

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Agricultural Finance Databook

*Mountain States include Wyoming, Colorado and northern New Mexico, which are grouped because of limited survey responses from each state. Sources: Federal Reserve District Agricultural Credit Surveys (Chicago, Minneapolis, Kansas City and Dallas).

Percent Change From Previous Year