“Persistently weak profit margins in the farm sector continued to intensify the challenge of maintaining adequate cash flow” in the first three months of this year, says the Kansas City Federal Reserve Bank. With farm income “suppressed,” farm lending activity was high, the bank said in its Ag Finance Databook covering conditions nationwide. Farm banks reported a slight increase in the number of non-real estate loans issued in the first quarter and said the volume of loans remained near record highs. “Large loans used to finance operating expenses remained the primary driver of demand for non-real estate loans.”
“The increasing share of large loans could be due to persistently high input costs or farm expansion, but may also indicate producers have become increasingly dependent on financing amid tighter profit margins in the farm sector,” said the regional Fed.
Agricultural banks were in strong shape but delinquency rates on farm loans increased slightly and loan repayment rates dipped. “Banks appeared to be taking proactive measures to reduce risk by increasing the amount of farm real estate used to collateralize large non-real estate loans and raising interest rates slightly,” said the regional Fed.
With the USDA forecasting farm income to fall for the third year in a row, the value of cropland fell in most of the states in the Plains and Corn Belt in the closing months of 2015. The exceptions were Oklahoma and Texas, where cattle ranching is a significant part of the farm economy, and in southern Wisconsin, where dairy farming is important.
“Though farmland values have remained relatively strong, a poor outlook for cash flow could continue to pressure a larger share of farm borrowers in the coming year, particularly those most highly leveraged,” said the Kansas City Fed.