Larger operating loans continued to boost farm lending activity at rural banks in the third quarter, said Kansas City Federal Reserve Economists Nate Kauffman and Ty Kreitman in a quarterly report.
The volume of non-real estate farm loans increased by more than 10% for the third straight quarter, Kauffman and Kreitman said. Operating loans accounted for nearly all the growth, driven by a nearly 25% increase in the average size of the loans.
Alongside continued growth in lending, interest rates rose sharply and pushed financing expenses to the highest level since 2019, the economists said.
HIGHER AG PRICES ADD ECONOMIC SUPPORT
Strong agricultural prices continued to support the farm economy, Kauffman and Kreitman said, but the rapid rise in production expenses could pressure profit margins and has shown initial signs of pushing demand for financing higher.
Prices of most major commodities remained elevated alongside favorable market conditions and supported a positive outlook for farm finances through the end of 2022, the report said.
Headwinds have intensified over the last few months, however, as uncertainty about supply and demand for many farm products in the coming year led to price volatility, Kauffman and Kreitman said. In addition, large portions of the US continued to be heavily affected by drought, which could hinder revenue prospects and has been particularly challenging for cattle producers.
LENDING TERMS TO FARMERS
Non-real estate farm lending at commercial banks increased at a steady pace in the third quarter, they said. The volume of farm loans increased 15% from a year ago, a rate similar to the previous two quarters.
On a rolling four-quarter basis, non-real estate lending was about 10% higher, which marked the fastest growth over a one-year span since 2019, the economists said.
Loans for operating expenses drove the increase in overall lending activity, Kauffman and Kreitman said. The volume of farm operating loans increased almost 30% from a year ago and was notably higher than recent averages for the third quarter.
Loans for other primary purposes, including lending for livestock purchases, declined slightly and were less than the 10-year average for this same time of year, the economists said.
As lending grew, interest rates on agricultural loans increased sharply alongside higher benchmark rates, the report said. The rates charged on all types of farm loans were an average of 180 basis points higher than the same time a year ago.
The rapid rise pushed rates for all types of loans to the highest level since 2019 and slightly more than the average from 2015-2019.
CATTLE, BEEF RECAP
The USDA reported formula and contract base prices for live FOB steers and heifers this week ranged from $148.87 to $153.00 per cwt, compared with last week’s range of $143.40 to $149.70. FOB dressed steers, and heifers went for $228.72 to $239.18 per cwt, versus $227.15 to $232.51.
The USDA choice cutout Wednesday was down $0.57 per cwt at $260.86 while select was up $1.25 at $228.60. The choice/select spread narrowed to $32.26 from $34.08 with 103 loads of fabricated product and 47 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 $2.20 to $2.30 a bushel over the Dec futures and for southwest Kansas were steady at $1.00 over Dec, which settled at $6.85, down 1 1/4.
Six steer contracts were retendered for delivery Wednesday at one.
The CME Feeder Cattle Index for the seven days ended Tuesday was $174.96 per cwt up $0.11. This compares with Wednesday’s Oct contract settlement of $176.42, down $0.17, and Nov’s $178.82, up $0.90.