Ag bankers are charging higher interest rates and allowing longer repayment periods because of persistently lower farm income, says the Ag Finance Databook published by the Federal Reserve. The quarterly publication says farm loan volume was down 7 percent during the first six months of this year compared to January-June 2016.
“Some of the sluggishness in the first half of 2017 may have been due to a prolonged renewal season,” said the report, which covers five Federal Reserve districts where agriculture is a major industry. Just as lenders put a careful eye on the financial foundation of borrowers, farmers and ranchers are responding to lower income by making significant cuts in production costs, which can reduce the need to borrow money.
“Interest rates on farm loans have continued to inch higher as the risk in the sector has increased,” says the fed report. During April, May and June, 14 percent of loans for farm operating expenses, machinery and other livestock carried an interest above 6 percent. Two years earlier, 40 percent of those loans were charged less than 4 percent interest. “Bankers also have lengthened maturity periods as an additional risk management strategy,” said the Databook. Loans now mature in an average of 35 months, compared to the average 23-month maturity from 2007-14.
“If farm income remains low, agricultural lenders may need to adjust to an environment of persistently sluggish loan growth and heightened risk in their farm loan portfolios,” said the Databook. For now, delinquencies remain close to their 10-year averages and and, at slightly more the 2 percent, are below the average delinquency rate for all bank loans.