Pinched by continued declines in farm income, producers are tightening their belts this year rather than borrowing money from the bank, says a quarterly report by the Federal Reserve. The volume of new non-real-estate loans issued by ag bankers from January-March was down 16 percent compared to the same period in 2016, and it followed a significant decline in the closing months of 2016.
It was the sixth consecutive year-over-year decline in volume for new non-real-estate loans, the majority of which are short-term operating loans to carry farmers and ranchers from expensive periods, such as planting season or purchase of livestock, until harvest.
“Persistent declines in farm income have remained a primary driver of reduced lending in the farm sector,” says the Fed’s Ag Finance Databook, noting forecasts of a 5-percent decline this year for revenue from corn, soybean, wheat and cattle. “Some producers have sought to make adjustments to production practices by reducing input costs when it has been possible to do so. These reductions in farm spending, stemming from persistent declines in farm income, likely have contributed to reductions in the volume of new farm loans.”
Lenders are accommodating producers by allowing longer repayment schedules. Higher interest rates are gradually being attached to non-real-estate loans. “Ongoing weakness in the farm sector has continued to affect loan performance but only at a very modest pace,” said Databook, compiled by the Kansas City Fed. The delinquency rate on agricultural loans “remained significantly lower than all other loan categories combined.”
Farmland values in Kansas are down 13 percent from a year ago, and by far the sharpest decline is in the Midwest and Plains, according to surveys of bankers by the regional Feds in Minneapolis, Chicago, Dallas and Kansas City. South Dakota had the second-largest decline, at 8 percent. Wyoming and Colorado were down 7 percent and North Dakota 6 percent. Texas and southern Wisconsin rose 3 percent and northern Indiana was up 2 percent.
“A gradual but steady softening in the farm economy has continued to push down the value of farmland throughout agricultural production regions,” said Databook. “Most bankers generally indicated they expect farmland values to moderate in the coming months, which could intensify financial stress in the farm sector, particularly in regions that have experienced significant declines in farm income and farmland values.”