Larger sized farm loans in the second quarter continued to boost lending activity while farm loan interest rates edged higher, said Kansas City Federal Reserve Bank Economists Ty Kreitman and Cortney Cowley in a release.
The volume of non-real estate agricultural loans grew at a steady, 17% pace alongside an increase in the number and average size of loans, Kreitman and Cowley said.
The average size of non-real estate farm loans at commercial banks has increased nearly 50% over the past 10 years alongside significant increases in costs and, in some cases, an increase in the size and scale of farm operations.
ACTIVITY UP, DESPITE HIGHER RATES
Lending activity rose despite modest increases in interest rates on farm loans, they said. Interest rates remained historically low but continued to increase from recent quarters on nearly all types of farm loans, as benchmark rates rose further.
Despite the recent increase, interest rates on farm loans remained historically low and were still, on average, about 75 basis points lower than the five years preceding the pandemic, the Federal Reserve Bank said.
The average maturity of some types of loans, particularly real estate loans, also increased during the quarter and were above recent historic averages, they said.
Farm lending activity showed signs of rebounding from a pullback in recent years and could grow further in the coming months as the higher costs of many major inputs become more fully realized, the report said.
Despite recent declines, agricultural commodity prices remained elevated through the first half of 2022 and continued to support revenue and income prospects across the farm sector, the Bank said. However, persistent pressure from higher production expenses could squeeze profit margins going forward and drive higher demand for credit.
The range of rates charged to borrowers also shifted upward as benchmark rates increased, they said. The share of operating loans with a rate above 5% nearly doubled from the same time a year ago and was higher than the same time in 2015.
Similarly, only 20% of new operating loans were originated with an interest rate of less than 4%, in contrast to about 30% a year ago, the Bank said.
LOAN DURATION UP
The maturity of most types of loans, particularly those for farm real estate, increased alongside higher interest rates and larger-sized loans, the economists said. The average duration of farm real estate loans was nearly two years longer than in 2021 and was well above the average from 2015-2019.
Average maturities on livestock and farm equipment loans also increased notably from last year and were above the recent historical average, while maturities on operating loans remained steady.
CATTLE, BEEF RECAP
The USDA reported formula and contract base prices for live FOB steers and heifers this week ranged from $139.72 to $140.35 per cwt, compared with last week’s range of $136.00 to $150.00. FOB dressed steers, and heifers went for $217.06 to $217.25 per cwt, versus $213.91 to $219.67.
The USDA choice cutout Monday was up $1.36 per cwt at $270.60, while select was up $0.65 at $242.90. The choice/select spread widened to $27.70 from $26.99 with 79 loads of fabricated product and 20 loads of trimmings and grinds sold into the spot market.
The USDA said basis bids for corn from feeders in the Southern Plains were steady to down $0.10 at $2.60 to $2.70 a bushel over the Sep futures and for southwest Kansas were unchanged at $0.10 over Sep, which settled at $6.07, down $0.09 1/4.
The CME Feeder Cattle Index for the seven days ended Friday was $174.74 per cwt up $2.43. This compares with Monday’s Aug contract settlement of $179.65, up $1.07.