Second-quarter farm debt continued to increase alongside faster growth in farm production loans, said Kansas City Federal Reserve Bank Economists Francisco Scott and Ty Kreitman, in a Bank release.
Similar to recent quarters, outstanding agricultural loan balances at commercial banks increased by about 5%, Scott and Kreitman said. Non-real estate loans increased at the fastest pace since 2016 while growth in real estate loans slowed slightly.
Even as debt balances continued to grow, farm loan performance remained strong, and delinquency rates edged lower for the third consecutive year, the economists said. The net interest margin and return on assets at agricultural banks were higher than a year ago, but softened slightly from the previous quarter as funding costs for lenders continued to rise.
AG CREDIT OUTLOOK STRONG
The outlook for agricultural credit conditions remained strong despite a recent moderation in the farm economy, the Bank said. A slight pullback in the prices of key farm products and elevated expenses could thin margins for some producers, but farm finances remained strong following several years of considerable strength.
Rising production costs and depletion of working capital could increase credit needs further, particularly for producers who have used cash reserves to reduce loan levels in recent years, the pair said. Although a growing share of lenders expect farm income and repayment rates to soften in the months ahead, agricultural credit conditions are likely to remain strong through 2023.
NON-REAL ESTATE LENDING RISES
Faster growth in non-real estate lending kept increases in farm debt steady in the quarter, Scott and Kreitman said. Outstanding farm production and farm real estate loans at all commercial banks increased 7% and 5% from a year ago, respectively.
Growth was stronger among agricultural banks, with non-real estate and farmland loans increasing 10% and 8% during the second quarter, respectively, they said.
Growth in farm loan balances was more pronounced than in recent years, particularly for agricultural banks, the report said. Farm debt increased from a year ago at slightly more than half of all banks, the largest share since 2016.
In comparison, farm loan balances grew at nearly 80% of agricultural banks, the Bank report said.
BETTER FARM FINANCES IMPROVE LOAN PERFORMANCE
Broad strength in farm finances continued to support gradual improvement in loan performances, the economists said. Delinquency rates improved in the second quarter and reached the lowest level since 2010 for real estate and non-real estate loans.
A reduction in balances of non-accruing loans and loans past due of 90 days or more counterbalanced a slight uptick in shorter term past dues, the Bank said. Despite a small increase in short term delinquencies, overall credit quality at agricultural banks remained strong.
CATTLE, BEEF RECAP
The USDA reported formula and contract base prices for live FOB steers and heifers this week ranged from $181.64 per cwt to $185.02, compared with last week’s range of $178.95 to $187.74 per cwt. FOB dressed steers, and heifers went for $283.68 per cwt to $290.47, compared with $279.95 to $289.61.
The USDA choice cutout Wednesday was down $0.86 per cwt at $301.26 while select was down $3.10 at $278.68. The choice/select spread widened to $22.58 from $20.34 with 139 loads of fabricated product and 57 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 $1.60 to $1.75 a bushel over the Dec corn contract, which settled at $4.82 1/4 a bushel, up $0.06.
The CME Feeder Cattle Index for the seven days ended Tuesday was $253.42 per cwt, up $0.55. This compares with Wednesday’s Sep contract settlement of $254.17 per cwt, up $0.67.