Stress in agricultural lending within the Federal Reserve’s Tenth District has increased over the last three years, especially in areas with a heavy concentration of cattle and/or wheat production, according to a study by the Federal Reserve Bank of Kansas City.
Stress may be compounded in areas of oil and gas production because of oil price volatility, the bank said. Even in a year like 2006, which was statistically better than the reference year of 2002, signs of stress were evident in Oklahoma and Wyoming, areas more commonly associated with wheat, cattle and energy production.
In contrast, areas associated with soybean production have fared better in recent years, the study showed. In 2016, most of the Tenth District experienced significantly higher stress in agricultural lending.
However, soybean exports were so high in the summer of 2016 that they supported a small bump in US Gross Domestic Product. Consequently, the probability of financial stress was lower in areas with a higher share of soybean production, the bank said.
MEASURING STRESS
Measuring stress in lending is not like measuring stress on the human body. It is a study of the ease with which loans are made and repaid.
Stress could be amplified if the outlook for the agricultural sector remains downbeat, the study said. Farm income has been forecast to remain low in coming years, and farm-sector liquidity continues to deteriorate.
If lower agricultural commodity prices and farm incomes persist, bankers will need to understand how regional and agricultural economic conditions, like annual changes in crop revenues, off-farm income and farm production expenses, affect farm loan repayment rates and contribute to stress in agricultural lending.
Declining loan repayment rates may lead to adverse outcomes for banks and borrowers, the Bank said. When farm borrowers are unable to service short-term debt obligations, their ability to obtain financing decreases.
In addition, if lending stress intensifies, agricultural banks could become less able to lend even to creditworthy farm borrowers, the study said. Farmers borrow for a wide variety of business-related reasons, and their purchases often spill over into local economies.
Therefore, when repayment rates decline and bankers are less able to lend to farmers, local economies and he general agriculture sector may experience worse outcomes.
The most common measures of loan stress are repayment rates, loan delinquency rates and loan defaults, they Bank said.
Loan repayment rates track the pace at which borrowers repay loans, taking into account the timing and amount of payments, the study said.
A loan becomes delinquent when a borrower has not made a payment on it in 30 days or more and are calculated as the percentage of loans that are delinquent over a particular period of time.
When a loan is delinquent for a certain period of time, the lender will declare it to be in default, and once in default, the entire loan balance is due to the lender, the bank said.
CATTLE, BEEF RECAP
No fed cattle sold Wednesday on the Livestock Exchange Video Auction, compared with 280 that traded three weeks previous at $109.50 per cwt.
Light cash cattle trading was reported in Nebraska early last week at a steady $107 per cwt on a live basis and $170 dressed. Friday, cattle traded at $111 per cwt live, up $3 to $4, and $172 to mostly $175 dressed, up $4 to $7.
The USDA choice cutout Monday was up $1.77 per cwt at $206.04, while select was up $0.91 at $197.38. The choice/select spread widened to $8.66 from $7.80 with 72 loads of fabricated product sold into the spot market.
The CME Feeder Cattle index for the seven days ended Friday, was $153.38 per cwt, up $0.67. This compares with Monday’s Sep settlement of $157.32, down $0.10.