The volume of loans made to farmers jumped during the fourth quarter, according to the national survey of bankers conducted in November.
Total volumes for non-real estate farm loans rose at the fastest pace in three years during the quarter as commercial banks made more loans at higher average amounts, the Federal Reserve Bank of Kansas City reported in a news release.
Farm real estate loan originations also accelerated during the quarter. Farm interest rates fell to historic lows with sharper declines at large commercial banks that used floating interest rates on farm machinery loans.
Rising production costs fueled farm lending during the fourth quarter. Loan volumes for feeder livestock rose further as prices for feeder livestock remained high due to short supplies resulting from past herd liquidations.
Current operating loans to livestock producers also remained high with elevated feed costs. In addition, rising fertilizer and seed prices enticed some producers to pre-pay for 2013 inputs, which boosted current operating loan volumes even higher.
A rush of capital spending before potential tax law changes lifted intermediate-term farm lending during the fourth quarter.
Tax provisions allowing accelerated depreciation on qualifying farm asset purchases, such as machinery, equipment and special-use or single-purpose farm buildings, including grain bins, drying systems and livestock barns, were set to expire at the close of 2012.
Producers taking advantage of the tax incentive helped to more than double the volume of farm machinery and equipment loans compared with last year. Intermediate-term loans for other, unspecified purposes also rose sharply according to the loan survey data.
Non-real estate farm loan portfolios expanded rapidly at ag banks of all sizes.
Average effective interest rates fell at large lenders or those with more than $25 million in farm loans, and they captured a greater percentage of the growth in non-real estate farm loans compared to small- and mid-sized banks, where interest rates held relatively steady.
The financial performance of ag banks strengthened in the third quarter, especially when compared with other small banks. The rate of return on assets at ag banks was 0.9 percent at the end of the third quarter, surpassing the 0.5 percent return at other small banks.
Similarly, the average rate of return on equity at ag banks was almost 8 percent in the third quarter, compared with about 5 percent at other small banks. Stronger profits lifted average capital ratios at ag banks to record highs.
Commercial banks saw a jump in farm lending during the third quarter after drought and rising input costs cut farm income.
Farm debt outstanding at all commercial banks rose 4 percent above year-ago levels in the third quarter, driven by non-real estate loan originations.
THE VOLUME of non-real estate farm loans swelled more than 5 percent compared with last year, and farm real estate loan volumes rose more than 3 percent annually.
Despite higher loan volumes, an increase in deposits kept the average loan-to-deposit ratio at ag banks near historic lows.
Farm loan delinquency rates held relatively steady. During the third quarter, delinquency rates on farm real estate loans dipped to 2.9 percent and remained well below delinquency rates on non-farm residential or commercial real estate loans.
At the same time, delinquency rates on non-real estate loans edged up to 1.7 percent, but remained near its four-year low.
Low delinquency rates contributed to a slight decline in charge-off rates for real estate and non-real estate farm loans at commercial banks. Still, delinquency and charge-off rates remained substantially higher at the largest 100 U.S. banks, when compared with other commercial banks.
Despite severe drought, farmland values continued to rise across most crop-growing regions in the third quarter.
Bankers in the Cornbelt and the Central Plains reported strong year-over-year farmland value gains, with stronger gains in the Western Cornbelt.
High crop prices and elevated crop insurance payments underpinned farm incomes and land values. Land lease revenues from energy production continued to propel farmland values in the Dakotas where non–irrigated cropland values were more than 30 percent above year-ago levels.
In contrast, farmland values in Texas were little changed following a second year of poor growing conditions and parched pastures.
Ag bankers in the Kansas City, Dallas and San Francisco Fed districts reported stronger annual gains in values for irrigated cropland compared with non-irrigated cropland and ranchland.
Even with low soil-moisture levels heading into 2013, very few bankers expected farmland values would retreat from their current highs, and most expected them to remain elevated in 2013.
Bankers reported farm lending varied with the severity of the drought. In the Kansas City and Dallas districts, severe drought raised feed costs for livestock operators and trimmed farm incomes but spurred operating loan demand for feed.
IN CONTRAST, rising incomes in the Minneapolis and San Francisco districts dampened operating loan demand but boosted farm capital spending.
Demand for dairy loans remained stable in the Chicago and Dallas districts while demand for feeder cattle loans was expected to weaken. The Richmond Fed anticipated rising loan volumes driven by feeder cattle, operating and farm machinery loans.
Most bankers reported lower interest rates for real estate and non-real estate loans with the exceptions of interest rates on short-term feeder cattle loans in the Dallas district, long-term real estate loans in the San Francisco district and operating loans in both those districts.
Farm credit conditions eased somewhat in the third quarter.
According to Federal Reserve District ag credit surveys, fewer bankers reported higher loan repayment rates during the quarter. Still, loan renewals and extensions held at low levels in most districts.
The availability of funds for farm loans remained high, and very few farm loans were referred to correspondent banks or non-bank credit agencies.
Collateral requirements for non-real estate farm loans were mixed, as requirements eased in St. Louis and San Francisco, held steady in Chicago and Dallas, and tightened slightly in Richmond, Kansas City and Minneapolis.