New farm lending is down sharply by agricultural banks, plunging 40 percent during the closing three months of 2016 in the largest year-over-year decline for non-real-estate loans in nearly two decades, says a quarterly Federal Reserve report. “As the outlook for farm income generally has remained weak and farmland values have continued to decline, both lenders and borrowers may have been more apprehensive about adding new debt heading into 2017,” said the report.
Some of the downturn in lending may have reflected lower prices for feeder cattle, seed and fertilizer and lower rental rates for farmland, along with low commodity prices following the 2013 collapse of the agricultural boom, said the report, compiled by the Kansas City Federal Reserve Bank. Farm operating loans, to cover expenses such as crop production, amount to 60 percent of non-real-estate lending, so “the decline in input expenses likely curbed the volume of new farm loans originated in the fourth quarter as farmers prepared for the 2017 planting season,” said the Fed report.
The share of nonperforming farm loans, 1.1 percent a year earlier, rose to 1.7 percent by the end of 2016. “Although still historically modest, the share of total nonperforming loans in the third quarter was the highest since 2012, and may have caused some lenders and borrowers to moderate their use of debt to prevent future financial stress,” said the Databook.
Farmland values across the Midwest and Plains are falling due to prolonged financial stress in the farm sector. Cropland values have fallen 20 percent in Kansas, 19 percent in Iowa, and 16 percent in Minnesota and South Dakota. “Although this represents an annualized rate of only 5-8 percent, persistent and gradual declines could lead to further financial stress in the farm sector in coming years,” says the Federal Reserve.
“If profit margins remain low through 2017, the pace of new debt will be a key indicator to monitor in assessing the severity of financial stress through the year.”