KC Fed – Farm Lending Declines but Remains Elevated10/28/2016
Farm lending at commercial banks declined in the third quarter of 2016, but remained elevated as lenders continued to assess the downturn in the U.S. agricultural economy, according to the Federal Reserve’s Agricultural Finance Databook.
The need for short-term financing in the farm sector remained high as profit margins remained weak. The volume of farm loans originated in the third quarter decreased about 19 percent from a year ago but remained elevated by historical standards.
Consistent with recent trends, loans for operating expenses continued to drive the demand for new loans. So far in 2016, loans used to finance operating expenses have comprised about 70 percent of all non-real estate farm loans and nearly 60 percent of total loan volume.
Alongside growing risk in the sector and slight declines in loan performance, agricultural bankers made modest adjustments to loan terms. Bankers also continued to rely more heavily on farm real estate as collateral.
Most prominently, the share of collateral on loans of more than $250,000 that was comprised of farm real estate increased from 10 percent to 32 percent. The sharp increase reversed a five-year decline in the use of farm real estate as a share of total collateral on non-real estate loans.
Farmland values continued to decline at a modest pace, which may put further pressure on agricultural credit conditions for some borrowers.
The Agricultural Finance Databook is a quarterly compilation of national and regional agricultural finance data. The complete report is available here.