Farm lending activity at commercial banks slowed further in the third quarter alongside a drop in operating loan volumes, said Kansas City Federal Reserve Bank Economists Nate Kauffman and Ty Kreitman, in a Bank release of the results of a survey of agricultural banks.
The number of new non-real estate farm loans was flat compared with a year ago while the average size shrank by nearly 20%, Kauffman and Kreitman said. The number of operating loans of more than $1 million dropped notably and the reduction in loan size contributed to the third straight quarter of declines in non-real estate farm loan volumes.
Lending has softened alongside nearly two years of increases in farm loan interest rates that have put considerable upward force on financing costs, the economists said.
FARM ECONOMY MODERATES
The farm economy moderated in recent months as profit margins thinned alongside lower commodity prices and elevated expenses, the Bank report said. Credit needs have increased for many borrowers alongside high input costs, but strong liquidity built up in recent years also allowed many producers to supplement additional loan advances.
Similarly, farm debt balances have grown during past quarters, according to commercial bank call reports, but a sizable share of lenders also reported subdued non-real estate loan demand in Federal Reserve district surveys, they said. Considerably higher financing costs likely prompted borrowers with ample liquidity to limit debt usage, but any softening in farm finances could reduce cash reserves and put upward force on lending demand.
The volume of new non-real estate farm loans at commercial banks dropped for the third straight quarter, according to the Survey of Terms of Lending to Farmers, declining by an average of 10% over the past year, the Bank said. The decrease was attributed largely to operating loans, while loans for feeder livestock increased notably from a year ago alongside substantially higher cattle prices.
A reduction in large loans pushed lending for operating expenses down, the economists said. The share of operating loans of amounts greater than $1 million dropped considerably at banks in the survey and was the lowest since early 2019.
As a result, the volume of operating loans of more than $1 million was cut by half from a year ago, and volumes comprised of smaller sized notes also decreased by 15%.
Lending slowed at larger lenders while increasing among smaller lenders, the pair said. The volume of non-real estate lending at banks with farm loan portfolios less than $25 million was nearly 25% more than the recent average for the third quarter while volumes were 25% lower at large banks.
The changes across bank size were in contrast to recent years and coincided with fewer large loans, which are more typical at bigger banks, the report said.
CATTLE, BEEF RECAP
The USDA reported formula and contract base prices for live FOB steers and heifers this week ranged from $185.00 per cwt to $189.69, compared with last week’s range of $182.09 to $187.00 per cwt. FOB dressed steers, and heifers went for $289.71 per cwt to $294.12, compared with $285.90 to $294.21.
The USDA choice cutout Thursday was down $0.65 per cwt at $306.85 while select was off $1.97 at $279.69. The choice/select spread widened to $27.16 from $25.84 with 122 loads of fabricated product and 29 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 $1.25 to $1.35 a bushel over the Dec corn contract, which settled at $4.79 1/4 a bushel, down $0.00 3/4.
No live cattle contracts were posted for delivery Thursday.
The CME Feeder Cattle Index for the seven days ended Wednesday was $240.62 per cwt, down $1.01. This compares with Thursday’s Oct contract settlement of $240.55, up $0.57.