Despite increasing somewhat from last year, originations of new farm loans at commercial banks remained subdued in the third quarter, said the Federal Reserve Bank of Kansas City in a news release.
Prices for most agricultural commodities remained low leading into the third quarter, contributing to a weak economic environment and weighing on lending conditions in the agricultural sector, the bank said. Although government payments and programs improved the outlook for farm finances, they also may have reduced the need for financing for some farm borrowers.
Moving forward, market conditions for some agricultural commodities could improve by year’s end because of lower expectations for crop inventories and an uptick in prices in October, the bank said.
However, the outlook for agricultural finance, like the general economy, is highly uncertain amid the ongoing pandemic.
FARM LOANS NOT KEEPING UP
Despite growing 15% from the previous year, total third-quarter, non-real estate loan volumes were below the 20-year trend, the bank said. Farm lending increased steadily since 2000, but activity in the third quarter of 2020 slowed following sharp growth in 2018.
Farm loan originations also remained below the five-year average, the bank said. Subdued volumes of operating loans contributed to the slowdown.
Operating loans increased from a year ago but remained less than 2017 and 2018, the bank said. Loans to finance feeder livestock and farm machinery followed a similar trend, while the volume of loans for other livestock remained steady.
All other loans declined for the second straight year, further weighing on overall loan volumes, the bank said.
Despite notable increases in the average size of all loan categories, the smaller number of loans seemed to restrain lending volumes, the bank said.
Livestock loans were larger, on average, for the second straight year, including a 40% increase in the size of loans for other livestock, which typically include breeding stock, the bank said. However, larger loan sizes seemed to be offset by smaller loan numbers. The total quantity of loans issued to farmers decreased, driven by a 12% decline in the number of operating loans.
INTEREST RATES DOWN
Interest rates on loans made to farmers declined sharply alongside the recent decrease in benchmark rates, the bank said. In the third quarter, the average effective interest rate on non-real estate farm loans fell 40 basis points from the previous quarter and was 180 basis points less than a year ago.
Banks that do more farm lending have cut interest rates more sharply than banks with small and mid-sized farm portfolios.
CATTLE, BEEF RECAP
Fed cattle trading last week was seen at $104 to $106 per cwt on a live basis, down $3 from the previous week. Dressed-basis trading was reported at $165 to $166 per cwt, down $3 to $4.
The USDA choice cutout Wednesday was down $0.91 per cwt at $205.79, while select was up $0.91 at $189.58. The choice/select spread narrowed to $16.21 from $18.03 with 125 loads of fabricated product and 48 loads of trimmings and grinds sold into the spot market.
The USDA reported Wednesday that basis bids from livestock feeding operations in the Southern Plains were unchanged at $1.08 to $1.20 per bushel over the Dec CME futures contract, which settled at $4.01 1/2 a bushel, down $0.14 1/2.
There were no delivery notices against the Oct live cattle futures market Wednesday.
The CME Feeder Cattle Index for the seven days ended Tuesday was $133.32 per cwt, down $0.32. This compares with Wednesday’s Oct contract settlement of $135.17 per cwt, up $0.87 and the Nov close of $133.90, up $1.60.