Mergers can disrupt local credit markets by changing financial institutions’ optimal portfolios, said Francisco Scott, economist at the Federal Reserve Bank of Kansas City, in an article Thursday.
There is evidence suggesting the Farm Credit System mergers may have affected some outcomes for banks in the markets most likely to be affected by mergers, Scott said. In the short run, FCS mergers could have influenced these ag credit markets along two margins.
MERGERS MAY HAVE CUT OPERATIONAL LOAN
Mergers may have contributed to a decline in ag banks’ ag operational loans as a share of total loans and to an increase in ag and non-ag real estate loans as a share of total loans in ag banks’ portfolios, Scott said. Mergers also may have led ag banks to incur higher interest expenses as a percent of earning assets than what pre-merger trends indicated.
Although higher interest expenses likely have a minimal effect on the level of profits, even small movements in interest expenses may be important to profitability, he said. Thus far, low interest expenses have kept ag banks more profitable than the FCS.
Although he found little evidence that FCS mergers affected ag banks’ efficiency ratios or interest income as a share of earning assets, banks that operate closer to important FCS branches and submarkets could have experienced larger effects than the data imply.
Banks that operate closer to FCS associations in the credit product space also could be more affected by FCS mergers, Scott said. Overall, his descriptive analysis suggested that FCS mergers likely have had an effect on some important outcomes for ag banks.
MERGERS BRING QUESTIONS
Commercial banks and the FCS have been the most important sources of US agricultural loans in recent decades, Scott said. Since the 1990s, however, mergers and acquisitions have increasingly concentrated FCS and commercial banks, raising concerns about potential effects on the agricultural credit market.
Economic theory suggests the merger of two or more competitors can change banks’ portfolio choices and use of resources, potentially changing the prices and availability of agricultural credit, he said. The FCS gained a substantial market share of total agricultural debt starting in the 2000s, lending credibility to these concerns.
Bankers’ associations have argued that Congress has granted the FCS unfair advantages that have helped it expand in local credit markets, possibly altering the equilibrium in market prices and the distribution of ag loans across different lending institutions.
Policymakers and researchers have noted the need to include the FCS in analysis of competition and concentration in the credit market, he said. Thus far, however, how the FCS’s evolving size and scope affect agricultural bank operations, particularly through mergers, has not been adequately examined.
CATTLE, BEEF RECAP
The USDA reported formula and contract base prices for live FOB steers and heifers this week ranged from $179.40 per cwt to $184.64, compared with last week’s range of $179.83 to $186.11 per cwt. FOB dressed steers, and heifers went for $282.31 per cwt to $289.54, compared with $284.16 to $289.29.
The USDA choice cutout Thursday was down $2.91 per cwt at $319.87 while select was off $2.72 at $289.97. The choice/select spread narrowed to $29.90 from $30.09 with 106 loads of fabricated product and 20 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 $1.30 to $1.50 a bushel over the Jul corn contract, which settled at $5.66 3/4 a bushel, up $0.18 1/2.
The CME Feeder Cattle Index for the seven days ended Wednesday was $230.26 per cwt, down $2.54. This compares with Thursday’s Aug contract settlement of $242.27 per cwt, down $2.42.