After contracting early in the year, producer borrowings edged higher in the second quarter. The cause was higher input costs, according to the latest Agricultural Finance Databook, published by the Federal Reserve Bank of Kansas City.
“Farmers and feedlot operators borrowed to pay for higher priced fuel, fertilizer and feed in the second quarter,” the July report says. With ample funds, most bankers were able to satisfy rising operating loan demand with low interest rates.
In contrast, intermediate-term loans for machinery and equipment purchases contracted during the second quarter, the report says. “With rising input costs, farm income expectations eased and capital spending in the farm sector cooled.”
In the second quarter, non-real estate farm loan volumes exceeded year-ago levels by 14%. The average size of short-term operating loans jumped 36% above year-ago levels. The cost of borrowing, however, fell as the average interest rate charged for operating loans dropped from 5.3% to 4.7%. In spite of higher costs for farm inputs, profits at agricultural banks strengthened in the first quarter, tripling the rate of return at other small banks, the report says.
“Still, a first quarter uptick in farm loan delinquency rates poses a slight risk to future profits. After easing at the end of 2010, delinquency rates on farm loans edged up, and higher input costs could further strain the ability of farmers to repay debt.” After trending downward last year, delinquent non-real estate loan volumes edged up and comprised 2.1% of outstanding farm production loans in the first quarter.
Even so, commodity prices and farm profits remained elevated in the first quarter, fueling additional gains in farmland values.
Loan performance measures for real estate loans deteriorated slightly in the first quarter. After dropping at the end of 2010, farm loan delinquency rates rose to almost 3% during the first quarter of 2011. The share of real estate loans 30 to 89 days past due also rose, setting the stage for rising delinquency rates in the coming months.
“Yet, real estate loan net charge-off amounts were on par with last year. Farm real estate loan volumes were slightly higher than 2010 levels in the first quarter,” the report says.
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