Despite a slight decline in the total number of loans reported by agricultural bankers, farm lending continued to increase in the first quarter of 2019, said Kansas City Federal Reserve Economists Cortney Cowley and Ty Kreitman in a Bank release.
The growth in loan volumes primarily was because of additional increases in the average size of loans, the economists said. Additionally, small, agricultural banks have made some adjustments to continue meeting strong demand from farm borrowers and mitigate risks associated with lending in a low-income environment.
GETTING CREATIVE
Despite continued weakness in agricultural credit conditions, earnings at agricultural banks have remained strong, delinquency rates low and farmland values stable, Cowley and Kreitman said. However, interest rates on farm loans continued to rise.
According to the National Survey of Terms of Lending to Farmers, non-real estate lending continued to increase, rising 9% in the first quarter of this year.
Although the volume of loans to finance operating expenses remained relatively steady, volumes for livestock loans and loans to finance machinery and equipment increased, the economists said. The increase in livestock lending likely was at least partially because of slightly higher prices for livestock.
In addition, the volumes and sizes of other loans increased notably, the bank said.
Alongside ongoing growth in demand for farm loans, a larger share of new loans has been originated with participation or syndication status, the bank’s survey found. Although participations have been on a slight upward trend at all banks, they have risen significantly in recent years at small, agricultural banks.
For example, in 2012, fewer than 10% of loans that were originated at small, agricultural banks were participated or syndicated to other institutions, compared with 40% in the first quarter of 2019.
In addition, more loans at small, agricultural banks have been insured by the Farm Service Agency or other government agencies, the economists said. Although a relatively small share of new loan volumes was insured by FSA, small, agricultural banks in recent years have utilized loan insurance and guarantees more than other banks.
A SIGN OF ECONOMIC STRESS?
Increased levels of loan guarantees and participations at small, agricultural banks relative to all banks could be an indication of elevated financial stress in the farm sector, the economists said.
Adjustments at small, agricultural banks have occurred alongside reduced liquidity in the farm sector, the release said. In fact, the ratio between total loan volume and net farm income reached a 16-year high in 2018 and remained elevated in the first quarter.
Most increases in loan volumes have been driven by increased loan sizes, as the number of loans originated has declined slightly, the bank said. Although the ratio of loan volumes to net farm income in 2018 and the first quarter of 2019 was high compared with recent years, it remained less than in the 1980s.
CATTLE, BEEF RECAP
Cash cattle trading in the Plains began the week at $126 to $127 per cwt on a live basis, steady to down $1 from last week. No dressed trades were reported, but took place last week at $207 to $208, up $3.
The USDA choice cutout Wednesday was down $1.15 per cwt at $232.96, while select was off $0.98 at $220.28. The choice/select spread narrowed to $12.68 from $12.85 with 117 loads of fabricated product sold into the spot market.
There were no tenders Wednesday for deliveries against the Apr futures contract.
The CME Feeder Cattle index for the seven days ended Tuesday, was $145.78 per cwt, down $0.06. This compares with Wednesday’s May contract settlement of $146.52, down $3.10.