Large Banks Cut Farm Interest Rates

November 29, 2011 04:52 PM

Despite softer loan activity across the nation, larger banks cut interest rates yet again on non–real estate loans to boost farm lending in the third quarter, according to the Federal Reserve System’s Agricultural Finance Databook.

Large banks—those with farm loan portfolios greater than $25 million—dropped the average effective interest rate on non–real estate farm loans to 3.6% during the quarter, well below the rate charged at small and mid-sized banks, the Fed says. These lower interest rates spurred sharp annual gains in non–real estate loan volumes at large banks, compared to declines at small and midsized banks. Large banks originated most of their loans with floating interest rates, while small and midsized banks extended variable rates on less than half of their loans, the Fed report states.

Still, overall farm lending was flat in the third quarter as strong agricultural profits limited non–real estate loan demand. Operating loan volumes held steady with higher input costs, but equipment and livestock loan volumes fell below year-ago levels. In total, loan volumes for farm machinery equipment dropped by almost half compared to the third quarter of 2010, following a spike earlier this year.

Large Banks Cut Farm Interest Rates

Real Estate Loans Gain Ground. In contrast, farm real estate loans accounted for a larger share of farm lending during the third quarter. National farmland values climbed higher in the second quarter, with anecdotal evidence of further gains during the third quarter. Annual farmland value gains reached record levels in many states, most notably in the Corn Belt and Northern Plains, where land prices rose more than 25% above year-ago levels.

Real estate loans comprised more than 12% of large bank lending activity, which is almost double the rate during the past year. The average effective interest rate on farm real estate loans has hovered around 5.5% during the past two quarters, with moderately lower rates charged at larger banks.

The quality of farm loans overall seems to be improving, the Fed says. Agricultural banks posted solid profits in the second quarter as improved repayment rates trimmed farm loan delinquencies.

Despite high commodity prices that boosted returns for producers in many regions, extreme weather conditions affected farm income in specific locations. The Dallas and Kansas City Districts reported crop losses in the Southern Plains due to the drought, while summer flooding and hurricanes damaged fields in the Minneapolis, Kansas City and Richmond Districts. However, crop insurance was expected to help mitigate lost farm income.

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