Across the country, farmers and ranchers are relying more and more on loans to pay their operating expenses, says a quarterly report on agricultural lending. Farm banks issued $88 billion in non-real estate loans during July, August and September, the highest third-quarter total since 1997 when adjusted for inflation. About half of the money went for operating loans. “Loans used to pay current operating expenses increased 24 percent from the same quarter a year ago, and continued to drive the overall increase in non-real estate farm lending,” said the Ag Finance Databook issued by the Kansas City Federal Reserve Bank.
Traditionally, non-real estate loans involved small amounts. “Recently, however, loans for more than $100,000 have expanded more rapidly,” said the Kansas City Fed. “In 2015, the number and size of loans has increased.”
The reliance on operating loans came at the same time that farm income is on the decline and has created concern about farm-sector liquidity. “One factor that mitigates concerns about repayment capacity, however, has been low interest rates for non-real estate loans” according to the report. Farm-sector debt hit $156 billion this spring, up 9.5 percent from the same point in 2014. Loan delinquency rates were 0.5 percent or less.
“Increased debt leverage and reduced liquidity have continued to intensify concerns about future financial stress for some agricultural producers,” said the report before concluding, “If a period of low farm income continues, some agricultural producers will be forced to use working capital more quickly to meet increasing debt obligations.”