Ag Banking News

15 JULY 2024— the volume of new operating loans increased 20% from a year ago, which followed a year-over-year increase of 12% last quarter.

Lending at commercial banks associated directly with farm production strengthened in the second quarter. According to the Survey of Terms of Lending to Farmers, the volume of new operating loans increased 20% year-over-year, following a 12% increase last quarter, according to the Survey of Terms of Lending to Farmers. This rise in lending at commercial banks, directly linked to farm production, was driven by larger loan sizes at small and mid-sized lenders, accompanied by slightly higher interest rates and longer maturities.

Following several years of subdued activity, demand for farm loans has rebounded alongside elevated production expenses and a moderation in farm sector liquidity. Alongside strong growth in new lending, outstanding non-real estate loan balances at commercial banks have surged.

Despite climbing swiftly from low levels in recent years, outstanding balances and new volumes of operating debt remain below historic averages after adjusting for inflation. Additional contraction in farm incomes and liquidity would likely increase financing needs further and interest costs could become increasingly burdensome for some agricultural producers.

Second Quarter National Survey of Terms of Lending to Farmers

In the second quarter, non-real estate farm lending by commercial banks saw a significant increase for the second consecutive quarter. The volume of loans for essential agricultural activities rose by over 15% compared to the previous year, with notable growth in loans for feeder livestock and operational costs. Strong demand for loans linked to primary farming activities was evident, while borrowing for non-essential and miscellaneous expenditures declined markedly. This drop might suggest that farmers are reducing discretionary spending.

The surge in lending was driven by larger loan sizes at small and mid-sized banks, which reached record levels for the second quarter. In contrast, large banks experienced a significant decrease in loan sizes, leading to a 20-year low in their lending volumes. Although smaller banks' lending volumes increased from last year's historically low levels, they still remained below the averages seen in previous decades.

Despite the rapid growth, overall lending volumes for major loan categories were still relatively low when adjusted for inflation. Non-real estate loan volumes were about 20% below the average for the second quarter over the past 20 years, and farm machinery lending was particularly weak, falling 40% below the recent historic average.

Lending activity continued to rise even with interest rates on farm loans at levels not seen in decades. The average interest rates for all types of agricultural loans increased slightly from the previous quarter and have been higher than the recent historical average since early 2023. This combination of higher loan volumes and elevated interest rates is likely to place additional strain on borrowers with high levels of debt.

Additionally, the average duration of non-real estate loans has lengthened, with terms extending by about two months beyond recent averages. This trend is also noticeable in livestock and operating loans, which are typically short-term.

Source: https://www.kansascityfed.org/