Farm debt continued to rise, particularly non-real estate loans, with outstanding agricultural loan balances at commercial banks increasing by about 5%, according to an ag finance update from the Kansas City Fed. While farm debt increased, loan performance remained strong, with delinquency rates edging lower for the third consecutive year. Agricultural banks reported higher net interest margins and returns on assets compared to the previous year but faced some softening in the last quarter due to rising funding costs.
The outlook for agricultural credit conditions remained robust, despite a recent moderation in the farm economy, the report says. While there may be some challenges, such as a slight pullback in key farm product prices and elevated expenses, farm finances remained strong overall. Rising production costs and the use of cash reserves to reduce loan levels in recent years could increase credit needs for some producers, the authors noted. Although more lenders anticipate a softening in farm income and repayment rates soon, agricultural credit conditions are expected to remain strong through 2023.
In the second quarter, faster growth in non-real estate lending contributed to steady increases in farm debt. Outstanding farm production and real estate loans at all commercial banks increased by 7% and 5% from a year ago, respectively, with agricultural banks experiencing even stronger growth. Farm debt increased from a year ago at slightly more than half of all banks, marking the largest share since 2016.
Despite the growth in farm loan balances, loan performance continued to improve. Delinquency rates reached their lowest level since 2010 for both real estate and non-real estate loans. Strong growth in loan interest over the past year helped offset higher deposit expenses and support net interest margins. However, interest margins flattened slightly in the last quarter due to a considerable rise in funding costs.
Bottom line: While there are margin challenges and potential softening in the farm economy, the agricultural credit outlook remains positive for the foreseeable future.
