With profit margins weak due to low commodity prices, farmers and ranchers are offering their land as collateral to obtain short-term operating loans — and banks are demanding it amid “a growing sense of risk in the farm sector,” said the Kansas City Federal Reserve Bank. In a quarterly report, the regional Fed said cropland values in the Midwest and Plains are flat or falling.
“The Kansas City, Minneapolis and Chicago districts have recorded declines or no change in the value of non-irrigated cropland each quarter since 2015,” said the Kansas City Fed in its Ag Finance Databook, a nationwide compilation of farm finance information. Cropland values in Kansas were 13 percent lower this spring than during the second quarter of 2015. In North Dakota, the decline was 8 percent and in Iowa, the No. 1 corn and hog state, cropland values fell by 6 percent.
“The use of farm real estate as collateral on non-real estate farm loans increased sharply in the third quarter (summer) from a year ago,” said the Databook. Real estate now provides one-third of the collateral on loans of $250,000 or more, compared to 10 percent a year ago. It was an abrupt end to a five-year decline, which began during the agricultural boom, in use of land and buildings as collateral. Real estate accounts for four-fifths of farm assets.
So far this year, loans to finance operating expenses comprise nearly 60 percent of total agricultural loan volume, the largest share in two decades. The reliance on loans corresponds with the steep decline in farm income since 2013, when the agricultural boom collapsed. USDA estimates net farm income this year will be less than 60 percent of the record $123.8 billion of 2013 due to lower crop and livestock prices.
Farm lenders have adjusted the terms of loans to farmers “in response to additional risk in agricultural lending,” said the Kansas City Fed. Some 85 percent of loans carry a floating interest rate “for only the second time since 1977” and “for only the third time since 1977, the average maturity period for operating loans edged above 14 months.
“Alongside growing loan demand, agricultural credit conditions remained downbeat from the perspective of the farm borrower,” said the regional Fed. Repayment rates are slipping and more producers are asking for loan renewals and extensions. “Deteriorating credit conditions in the agricultural sector across the country have reflected ongoing weakness in each (Federal Reserve) district’s agricultural economy and have further indicated a growing sense of risk in the farm sector.”
Net farm income “is likely to remain well below recent peaks for several years,” said the think tank Food and Agricultural Policy Research Institute early this month. It forecast farm income of $70.8 billion this year and $72 billion in 2017, rising to nearly $80 billion in 2019. The 10-year average for 2003-12 was $78.2 billion.