Growth in farm lending activity at commercial banks was limited in the first quarter of 2023 as interest rates climbed, said Kansas City Federal Reserve Bank Economists Nate Kauffman and Ty Kreitman, in a Bank release.
However, farm lending growth was limited as interest rates climbed, Kauffman and Kreitman said.
THE PROBLEM WITH INTEREST RATES
Alongside increases in the federal funds rates, interest rates on farm loans rose sharply, the economists said. Non-real estate farm loan volumes decreased about 10% from the 2022 quarter, following average growth of 15% in for 2022.
Lending activity was pressured by fewer new loans and smaller operating loans, the pair said.
THE OUTLOOK
The outlook for farm finances remained favorable alongside elevated commodity prices, but higher interest rates, increased production costs and drought remained key ongoing concerns, the release said. Remarkably strong farm income during recent years has bolstered liquidity for many and supported historically strong farm loan performance.
The availability of credit at agricultural banks remained ample, and while higher expenses could increase borrowing needs for some operations, substantially higher interest costs could also pressure credit demand.
The average rate charged on all types of farm loans increased for the fifth straight quarter and reached its highest level since 2007, they said. Rates on non-real estate and real estate loans were nearly 4.5 and 3.5 percentage points higher than the end of 2021, respectively.
The range of interest rates available to borrowers also shifted rapidly, the economists said. In contrast to the average of the past two decades, about 75% of new loans in the first quarter had an interest rate above 7%.
In comparison, more than half of farm loans had rates below 5% on average from 2011 through 2020, they said.
DISTRIBUTION OF FARM LOAN RATES
As first-quarter interest rates increased, non-real estate farm lending at commercial banks declined, according to the Survey of Terms of Lending to Farmers, the release said. The volume of non-real estate farm loans decreased about 10% in the first quarter, and most of the decline was attributed to operating loans.
While costs for farmers remained elevated, the price of some key inputs like fertilizer and fuel were notably lower than a year ago and likely reduced credit needs for some producers, the economists said.
A fewer number of loans and a lower average size reduced lending for operating expenses, they said. The average size of operating loans decreased from a year ago and was near the recent average while the number of loans remained at a historic low.
The softening in lending activity kept total operating loan volumes about 15% below the average over the past decade, the economists said.
CATTLE, BEEF RECAP
The USDA reported formula and contract base prices for live FOB steers and heifers this week ranged from $176.18 per cwt to $183.96, compared with last week’s range of $172.20 to $179.46 per cwt. FOB dressed steers, and heifers went for $269.25 per cwt to $281.66, compared with $261.33 to $273.20.
The USDA choice cutout Wednesday was down $1.14 per cwt at $305.92 while select was down $0.15 at $291.46. The choice/select spread narrowed to $15.45 from $15.46 with 89 loads of fabricated product and 17 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 $1.63 to $1.75 a bushel over the May corn contract, which settled at $6.72 1/4 a bushel, down $0.05 1/4.
No live cattle futures deliveries were tendered Wednesday.
The CME Feeder Cattle Index for the seven days ended Tuesday was $206.23 per cwt, down $0.14. This compares with Wednesday’s Apr contract settlement of $204.67 per cwt, down $1.25.