Farm Loan Growth Includes Nonperforming Loans, Fed Says

Growth in the average size of farm operating loans boosted agricultural lending in the second quarter of this year, as did growth in nonperforming loans, said a report by Nathan Kauffman, vice president of the Federal Reserve’s Omaha branch, and Ty Kreitman, assistant economist at the bank.

However, the overall increase in financial stress in agricultural lending remained relatively modest and stability in the value of farm real estate remained an ongoing source of support.

 

LOAN SIZE RISING

 

The size of farm loans continued to rise, and loans exceeding $1 million had a significant effect on the overall volume of new loan originations, the pair said in a report through the Kansas City Federal Reserve.

The average duration of farm loans also lengthened alongside elevated demand for financing, another potential signal of increased credit stress, the economists said.  Despite increased pressure from weaker farm finances and recent increases in interest rates on farm loans, farmland values continued to hold relatively steady.

The volume of loans increased 11% compared with last year, the fastest pace of second-quarter growth since 2011.  Operating loans continued to comprise the majority of non-real estate farm lending and increased more than 16%.

The second quarter also marked the ninth straight quarter showing a year-over-year increase in total non-real estate loan volumes, the bank said.  During these nine quarters, the annual pace of growth has averaged 14%, and compared with the period from 2000 to 2009, the average size of all second-quarter non-real estate loans this year was nearly $34,000 larger.

Over that period, feeder livestock loans were nearly $40,000 larger while loans to fund current operating expenses more than doubled and were about $34,000 larger than the first decade of the 2000s, they said.

 

LOAN DURATION ALSO INCREASING

 

Alongside larger loans, loan durations in recent quarters also increased, the economists said.  Compared with a year ago, the average duration of all non-real estate farm loans in the second quarter increased nearly three months.

That increase was driven by maturities on new loans at the largest agricultural banks, the Federal Reserve Bank report said.  The average duration at the smallest agricultural banks declined slightly from a year ago but remained above recent historical norms.  Durations at the largest banks continued to trend upward, increasing about four months.

While the average risk rating of new non-real estate loans remained sound overall, the share of problem loans in recent years has increased slightly, the economists said.

Loans reported as special-mention, or classified, most commonly were given to problem borrowers, they said.

After reaching a five-year high in 2018, the share of classified loans declined slightly in the first quarter.  They were above the 2008-2018 average but remained slightly higher at the largest agricultural banks, totaling 8% on a rolling four-quarter basis, compared with less than 3% at the smallest banks.

 

CATTLE, BEEF RECAP

 

Cash cattle traded in the Plains last week at $112 per cwt on a live basis, up $1 to down $2.50 from the previous week with trades up to $115 to $116 in Iowa.  Dressed-basis trading appeared at $183 with some up to $185 in Iowa, steady to up $1.

The USDA choice cutout Tuesday was up $0.77 per cwt at $214.03, while select was up $1.37 at $191.13.  The choice/select spread narrowed to $22.90 from $23.50 with 86 loads of fabricated product sold into the spot market.

The CME Feeder Cattle index for the seven days ended Monday was $142.08 per cwt, up $0.58 from the previous day.  This compares with Tuesday’s Aug contract settlement of $143.10, up $0.80.