Strong growth in farm real estate debt pushed agricultural loan balances at commercial banks higher in the second quarter, said Kansas City Federal Reserve Economists Nate Kauffman and Ty Kreitman in a release.
Outstanding farm debt increased about 5% from the previous year, the fastest pace in nearly six years, Kauffman and Kreitman said. While agricultural real estate loans continued to build, production lending rose modestly following a period of subdued demand.
Loan performance also improved, the economists said. Recent loan growth supported a slight improvement in interest margins and income at agricultural banks from last quarter, but bank liquidity remained abundant, they said.
AG ECONOMY STEADY
The agricultural economy remained steady over the past quarter, providing ongoing support to farm finances, the report said. The price of most major commodities remained elevated and the outlook for profit opportunities across the sector in 2022 was positive despite heightened volatility in some markets.
With substantially higher production costs and weather risks, incomes could be pressured if commodity prices drop, the economists said. Credit needs also could be pushed higher.
Despite growing risks, farm balance sheets remained strong alongside high liquidity, and a sharp increase in farm real estate values continued to support agricultural credit conditions.
REAL ESTATE DEBT GROWS
An acceleration of farm real estate debt drove growth in agricultural loan balances, the Bank said. Agricultural real estate loans grew by almost 7% from a year ago, and outstanding balances remained above the average of the past 10 years.
Non-real estate farm debt showed additional signs of rebounding, increasing modestly following nearly two years of considerable retraction, the economists said. But balances remained well below the recent average.
As debt balances grew, loan performance continued to improve alongside strength in farm finances, they said. The delinquency rate on real estate and non-real estate farm loans at agricultural and non-agricultural banks declined for the seventh straight quarter.
Problem loan rates on real estate loans reached a historic low, and delinquencies on production loans also edged toward all-time lows, the report said.
Earnings performance at agricultural banks improved slightly alongside growth in lending and an increase in interest rates, they said. Following two years of steady contraction, the net interest margin increased slightly during the quarter and supported a modest increase in bank profits.
The uptick in interest income coincided with growth in loan balances, but liquidity among farm lenders remained ample, they said.
Capital ratios at agricultural banks steadied, but some measures of equity dropped considerably because of recent developments in securities markets, the report said. The Tier 1 Leverage Capital ratio remained sound and increased slightly from the previous quarter, but the equity capital ratio dropped sharply.
CATTLE, BEEF RECAP
The USDA reported formula and contract base prices for live FOB steers and heifers this week ranged from $142.00 to $147.63 per cwt, compared with last week’s range of $142.00 to $148.37. FOB dressed steers, and heifers went for $222.42 to $228.22 per cwt, versus $220.22 to $229.10.
The USDA choice cutout Thursday was down $0.27 per cwt at $258.07 while select was down $1.15 at $236.59. The choice/select spread widened to $21.48 from $20.60 with 94 loads of fabricated product and 15 loads of trimmings and grinds sold into the spot market.
The USDA said basis bids for corn from feeders in the Southern Plains were unchanged at $2.50 to $2.60 a bushel over the Sep futures, which settled at $6.58 1/4 a bushel and for southwest Kansas were at $0.85 over Dec, which settled at $6.58, down $0.12 1/2.
The CME Feeder Cattle Index for the seven days ended Wednesday was $182.36 per cwt down $0.67. This compares with Thursday’s Sep contract settlement of $183.15, up $0.70.