Farmers are borrowing more money—both crop and livestock producers—but for vastly different reasons. That means the potential for another record for farm debt in the second quarter once final numbers are tallied. "The recent uptick in the number of loan renewals and extensions and the softening of loan repayment rates will be indicators to watch," according to Agricultural Finance Databook, from the Federal Reserve Bank of Kansas City. The report covers commercial banks but not the Farm Credit System.
"Narrower profit margins have prompted additional borrowing to pay for operating costs," the report says. Although crop insurance may offer a measure of revenue protection in 2014, a prolonged period of low crop prices could raise concerns about increased leverage and available working capital, the Fed notes.
Total non-real estate farm borrowing in the second quarter rose from a year ago. The cause is two-fold:
After rising 13% year-over-year in the first quarter, loan volume for feeder livestock spiraled 50% higher in the second quarter, coinciding with the steep run-up in feeder livestock prices this year.
Second, lending to the crop sector increased further in the second quarter as low crop prices reduced income and farmers financed relatively high input costs. "A sharp rise in short-term borrowing for operating expenses in the first quarter was followed by a 5% increase in the second quarter as production expenses held at high levels. Furthermore, anticipation of potential record crop yields this fall was expected to keep corn and soybean prices low, dampening prospects for future income."
Not all farm lending has ratcheted higher. Loans for farm real estate accounted for 10% of new loan originations, compared to 15% a year ago. The smaller share of real estate loans represents a 33% year-over-year decline in the second quarter. However, while the sharp run-up in farmland prices seems to have abated—especially in the Corn Belt—most bankers surveyed say farmland values will hold near current high levels for the near term.
Commercial banks continue to seek high-quality borrowers by offering favorable loan terms. Average effective interest rates on non-real estate debt have continued to trend lower at both large and small-to-midsize banks. Average effective interest rates on feeder livestock and operating loans held at low levels in the second quarter and have fallen by nearly a full percentage point since the beginning of 2012. Interviews with lenders suggest, however, that beginning in 2015, a spike in interest rates is likely. A separate report issued by the Chicago Fed notes that average interest rates for feeder cattle stood at 4.98% (below 5% for the first time in the survey’s history), real estate, 4.67%, and operating loans, 4.86%.
The report says that collateral requirements for farm loans tightened in all districts except San Francisco.
Examining first quarter data, the Kansas City Fed says that commercial bank lending to the farm sector rose at the strongest pace since early 2007. Many bankers look for continued growth in the need to borrow for working capital. With lower incomes and increased borrowing, bankers in the Chicago, Kansas City, Minneapolis and Richmond districts report a slight drop in repayment rates.
The Chicago Fed report notes the concern of heightened competition. A focus of this concern was the difficulty for banks in matching loan offers by the Farm Credit System. According to surveyed bankers, for the first six months of 2014, the amounts of farm operating loans and mortgages originated by FCS institutions were higher than typical. Similarly, merchants, dealers and other input suppliers lent more than usual to farmers. In contrast, life insurance companies lent less than usual.