First-quarter farm debt at commercial banks continued to grow at a steady pace from the year prior, boosted by a substantial increase in farm operating debt, said Kansas City Federal Reserve Bank economists Francisco Scott and Ty Kreitman, in a Bank release.
The growth in real estate debt remained robust but down from the peaks observed in early 2023, Scott and Kreitman said. Overall, agricultural banks remained financially stable despite a slight increase in farm loan delinquency rates.
The strong growth in farm operating debt in the first quarter reflected an increase in farmers’ financing needs, which had been subdued since 2021, the Bank release said. The uptick in demand, along with higher benchmark interest rates, resulted in a substantial increase in yields for these loans and higher interest earnings for agricultural banks.
However, margins for agricultural banks increased only modestly as the growth in interest income was partly offset by higher interest expenses.
PRODUCTION LOANS BOOST FARM DEBT
Substantial growth in agricultural production loans boosted farm debt balances, the economists said. Non-real estate farm loans at commercial banks ended the first quarter nearly 15% higher than a year ago, the largest increase since the late 1970s. The rapid increase in operating debt boosted total agricultural debt as farm real estate debt increased only modestly.
The growth in agricultural debt was concentrated in small and mid-sized farm lenders, they said. Three quarters of the $15 billion increase in farm debt was attributed to banks with agricultural loan portfolios of less than $500 million.
The largest lenders with portfolios of more than $1 billion accounted for about 10% of the growth, they added.
Alongside strong loan demand and higher benchmark interest rates, yields on farm operating loans grew considerably at agricultural banks, the economists said. Yields on farm operational loans increased by more than one percentage point from the previous year, surpassing the growth in yields for other assets.
Agricultural banks continued to expand their loan portfolio, replacing lower-yielding assets on their balance sheet, they said.
Even as farm loan yields rose, the growth rate in interest expense continued to outpace income and limit margins for agricultural banks, the Bank said. As benchmark rates increased in recent years, interest expenses for many community banks rose faster than interest income and pressured net interest margins. Profits remained solid despite tight margins, and the recent demand for higher yielding farm operating loans could provide support to interest income going forward.
CATTLE, BEEF RECAP
The USDA reported formula and contract base prices for live FOB steers and heifers this week ranged from $186.56 per cwt to $198.26, compared with last week’s range of $185.00 to $190.99 per cwt. FOB dressed steers, and heifers went for $291.73 per cwt to $301.67, compared with $291.77 to $304.06.
The USDA choice cutout Thursday was up $2.17 per cwt at $322.87 while select was up $1.14 at $304.40. The choice/select spread widened to $18.47 from $17.44 with 79 loads of fabricated product and 19 loads of trimmings and grinds sold into the spot market.
The weighted average USDA listed wholesale price for fresh 90% lean beef was $366.58 per cwt, and 50% beef was $91.80.
The USDA said basis bids for corn from feeders in the Southern Plains were unchanged at $1.50 to $1.60 a bushel over the Jul corn contract, which settled at $4.39 3/4 a bushel, down $0.10 1/4.
No delivery intentions were posted Thursday for the Jun live cattle futures contract.
The CME Feeder Cattle Index for the seven days ended Tuesday was $255.47 per cwt, down $1.60. This compares with Thursday’s Aug contract settlement of $259.82, down $0.12.