Lender competition, a strong farm economy and solid loan repayment rates have been driving factors of lower interest rates on farm loans during the third quarter, according to the Kansas City Federal Reserve.
KC Fed Omaha branch executive Nathan Kauffman and associate economist Maria Akers explain in the latest Ag Finance Databook that each of those factors, coupled with longer maturities on non-real estate farm loans at commercial banks, contributed to lower interest rates overall.
Agricultural loan volumes at commercial banks returned to the previous year’s levels during the third quarter after rising in the spring, the economists explain. This could be attributed to rising farmland values, which supported farm real estate financing. High production costs also drove demand for farm operating loans.
Livestock and farm equipment loans in the commercial sector, however, were a bit lower though off-set by higher non-real estate loans for unspecified purposes.
Delinquency rates on both real estate and non-real estate loans also fell further at commercial banks in the third quarter.
Agricultural banks reported improved profits and stronger capital positions at midyear, Akers and Kauffman report.
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, the report says.
Solid farm credit conditions regionally
Akers and Kauffman note that as a whole, U.S. 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.
Looking ahead, the report estimates that weaker farm income from strong crops may limit capital spending and lower demand for machinery and equipment loans but prompt more short-term borrowing for next year’s crop inputs.
For the whole report, click here.