Agricultural debt at commercial banks eased further at the end of 2020, and loan repayment problems moderated slightly, said Economists Cortney Cowley and Ty Kreitman of the Kansas City Federal Reserve Bank of Kansas City in a release.
General improvement in the agricultural economy likely drove the pullback in farm lending activity and strengthened credit conditions, the pair said. Higher crop prices and an influx of government payments in 2020 also contributed to stronger growth in deposits, which supported a sharp increase in liquidity at agricultural banks.
LOAN BALANCES REACH FIVE-YEAR LOW
Agricultural loan balances at commercial banks reached a five-year low in the fourth quarter and continued to shift toward farm real estate, the bank said. Although the accumulation of farm debt remained higher than the average of the past 10 years, the total value of farm loan portfolios fell 5% from the previous year.
Moreover, loans to purchase farmland accounted for 57% of total loan volumes, which was the highest allocation for real estate loans on record.
Total farm debt decreased at the fastest pace since the 1980s, with continued declines in both farm real estate and production loans, the economists said. In the fourth quarter, the drop in total farm debt was driven by a 9% decline in non-real estate loans and a 1% decline in real estate loans.
Although the decline in loans to finance farm real estate remained small, it was the first time farmland loans decreased for three consecutive quarters since 1981, the release said.
DELINQUENCY RATES DECLINE
Alongside better farm financial conditions and lower debt levels, delinquency rates on agricultural loans declined from a year ago, the bank said. From 2014 to 2019, delinquency rates on farm loans grew by about 0.2 percentage points per year in the fourth quarter, on average.
However, the share of real estate and non-real estate loans past due fell 0.16 and 0.24 percentage points, respectively, from the previous year in 2020, which was a notable reversal of the previous trend, the economists said.
In contrast to recent years, liquidity at agricultural banks surged in 2020, the release said. Total deposits at agricultural banks increased almost 3% from the previous year in the fourth quarter.
In addition, total loans outstanding decreased nearly 8%, the pair said. The strong growth in deposits combined with the decline in loan balances led to a significant decline in loan-to-deposit ratios.
BANKS FINANCIALLY STRONG
Agricultural banks remained financially strong, despite a historically low net interest margin, the Federal Reserve Bank said. 2020 interest income decreased more than interest expense and asset balances increased at agricultural banks, driving a sharp decline in the net interest margin.
CATTLE, BEEF RECAP
Fed cattle trading this week was at mostly $115 up to $116 per cwt on a live basis, up $1 from last week. Dressed-basis trading was at $184 to $185 per cwt, up $3 to $4.
The USDA choice cutout Wednesday was up $0.85 per cwt at $234.84, while select was down $1.16 at $224.07. The choice/select spread widened to $10.77 from $8.76 with 81 loads of fabricated product and 45 loads of trimmings and grinds sold into the spot market.
The USDA reported Wednesday that basis bids for corn from livestock feeding operations in the Southern Plains were unchanged at $1.25 to $1.27 a bushel over the May CBOT futures contract, which settled at $5.53 1/4 a bushel, up $0.02.
The CME Feeder Cattle Index for the seven days ended Tuesday was $134.86 per cwt, up $0.22. This compares with Wednesday’s Mar contract settlement of $135.77 per cwt, up $0.32.