Despite mounting farm-sector pressure and limited profit opportunities, farmland value has continued to provide ongoing support and remains a key area to watch in coming months if leverage continues to increase, said the Omaha, Neb., branch of the Kansas City Federal Reserve Bank last week.
Fourth-quarter 2018 farm lending continued to grow alongside a similar increase in interest rates on them.
Because of strong farm-loan demand, liquidity at agricultural banks trended lower, and collateral requirements continued to tighten in the third quarter, the bank said.
Delinquency rates on farm loans inched up but remained historically low, and financial performance at agricultural banks remained relatively strong, the bank said.
NON-REAL ESTATE LENDING RISES
Non-real estate lending continued to increase in the fourth quarter and were up nearly 8% from a year earlier, the bank said. It was the seventh straight quarter of annual growth in loan volumes, with an average 2018 growth rate of about 12%.
As lending needs increase, the size of farm loan portfolios at commercial banks also grows, and both have contributed to a shift in loan volumes based on the size of the farm loan portfolio. Non-real estate loan volumes at the largest agricultural banks (those with farm loan portfolios larger than $25 million) were up about 16% from the fourth quarter of 2017.
In contrast, the volume of lending at banks with farm loan portfolios of less than $25 million was down 15%.
The increase in farm financing also continued to be driven by lending to fund current operating expenses, the bank said. Fourth-quarter operating-loan volume reached a historical high, increasing more than $10 billion, or 22%, year over year.
Operating-expense loans accounted for the largest share of non-real estate farm loans and have increased in the last eight quarters by an average of 12%, the bank said.
While representing a much smaller portion of total lending, loans to finance farm machinery and equipment nearly doubled from the 2017 quarter, the bank said. The volume of loans for all other purposes declined over the same period.
INDIVIDUAL LOANS GROW
Alongside an expansion in the overall volume of non-real estate farm lending was the size of individual loans, the bank said. Since declining modestly in late 2016, the average size of all non-real estate loans has increased year over year for almost two years and at an average pace of 10%.
Adjusting for inflation, the average size of all non-real estate loans reached the highest fourth-quarter level since 2014, and the average size of loans to fund current operating expenses grew to the largest on record, the bank said.
INTEREST RATES GROW
As the volume of farm loans increased, interest rates also rose, the bank said. The distribution of rates has shifted significantly, and in the fourth quarter 40% of all non-real estate farm loans were charged a rate greater than 6%.
In fourth-quarter 2017, a quarter of all loans were charged an interest rate less than 4%.
CATTLE, BEEF RECAP
Cash cattle traded last week at mostly $124 up to $125 per cwt on a live basis, up $1, and at $196 to $197 on a dressed basis, also up $1 from the previous week.
The USDA choice cutout Tuesday was up $1.08 per cwt at $216.34, while select was up $0.86 at $211.72. The choice/select spread widened to $4.62 from $3.70 with 76 loads of fabricated product sold into the spot market.
The CME Feeder Cattle index for the seven days ended Monday, was $141.62 per cwt, down $0.09. This compares with Tuesday’s Jan settlement of $141.05, down $0.40.