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Livestock loans boost farm lending
By Larry Dreiling
Commercial banks boosted lending to livestock operators in the first quarter, according to the Federal Reserve System’s Agricultural Finance Databook.
A February survey of national commercial banks found that bank lending for livestock purchases rose to its highest level in almost a decade. High feeder cattle prices kept loan volumes to cattle feedlots elevated. With expectations of further declines in crop and feed prices during 2013, the potential for improved profits also supported lending activity to other livestock operations.
Real estate loan volumes trended higher as farmland markets remained active. Despite heightened sales activity, farmland prices surged further supported by strong farm incomes. Farmland values were expected to remain at record levels and real estate loan volumes appeared to advance modestly in the first quarter of 2013.
Profits at agricultural banks also continued to improve in the fourth quarter of 2012. The average return on assets and return on equity reached their highest levels in five years. Ample funds were available for financing as agricultural banks competed for high-quality farm loans, driving interest rates for real estate and non-real estate loans to new lows.
According to the national Survey of Terms of Bank Lending to Farmers conducted during the first full week of February, the total volume of non-real estate farm loans made during the quarter jumped 9 percent in the first quarter of the year. An increase in the number of loans to the farm sector more than made up for a slight decline in average loan amounts. Farm real estate loan originations also rose during the first quarter.
Loans to livestock enterprises surged to historically high levels as operators financed livestock purchases and production expenses. With feed costs expected to moderate throughout 2013, potentially improving livestock profitability, loans to purchase livestock rose sharply in the first quarter.
However, low cow inventories underpinned high feeder cattle prices and contributed to higher loan volumes to feedlot operations. In addition, current operating loans jumped compared with last year, as winter feeding expenses remained elevated.
The crop sector also paid high input costs for fertilizer and seed, though crop insurance payments eased the effect of drought on crop incomes. After surging at the end of 2012, loan volumes for farm machinery and equipment purchases fell below year-ago levels, as did intermediate-term loans to farmers for other, unspecified purposes.
The share of loans with a floating interest rate made to livestock operations jumped in the first quarter. The share of loans made with a floating interest rate rose to almost 70 percent for feeder livestock and exceeded 75 percent for other livestock loans and current operating expenses. Commercial banks also competed intensely for agricultural loans, driving average effective interest rates to new lows. The lowest rates were reported in the Pacific Rim and the Corn Belt.
Ag banks show big gains
Agricultural banks posted their best financial performance in five years with strengthening profits in 2012. The rate of return on assets at agricultural banks topped 1.1 percent at the end of the year, compared with 0.8 percent at other small banks. The average rate of return on equity at agricultural banks rose to 10.2 percent in the fourth quarter, well above the 7.3 percent reported for other small banks. In addition, the percentage of agricultural banks with negative income as a share of average equity fell to a 5-year low. Furthermore, there were only two agricultural bank failures in 2012 from the more than 50 commercial bank closures during the year.
Farm lending at commercial banks soared at the end of the year. Farm debt outstanding at all commercial banks rose almost 5 percent in the fourth quarter, the largest year-over-year jump since early 2009. High input costs and a surge in farm machinery and equipment purchases to take advantage of tax incentives drove non-real estate loan volumes 5 percent higher than last year. Potential changes in tax policies also enticed more landowners to sell farmland before the end of 2012, pushing farm real estate loan volumes 4.6 percent above year-ago levels. Despite higher farm loan volumes, rising deposits at agricultural banks kept average loan-to-deposit ratios steady for much of 2012.
Farm loan delinquency rates fell during the fourth quarter. Following an uptick in the third quarter, delinquency rates on non-real estate farm loans dropped to 1.4 percent and loan charge-off rates held steady. Delinquency rates on farm real estate loans trended down for the second straight year, falling to 2.7 percent in the fourth quarter of 2012. In addition, charge-off rates on farm real estate loans fell to their lowest level in four years.
Bankers in agricultural growing regions reported strong year-over-year farmland value gains in the fourth quarter. Strong interest in farmland from both farmers and nonfarm investors drove real estate prices higher in many areas despite increased sales and lingering drought conditions.
Robust energy production and less severe drought conditions in the Northern Plains helped to substantially push up the value of non-irrigated farmland. Cropland values in the Corn Belt continued to build on previous gains.
Back-to-back years of drought in the Southern Plains limited non-irrigated farmland value gains but fueled demand for irrigated acreage. Still, most bankers expected farmland values would hold at record levels regardless of weather patterns during the coming year. Interest rates to finance farm real estate loans continued to edge down.
Elevated crop prices and crop insurance payments due to drought supported farm incomes and capital spending in the fourth quarter. Bankers reported a surge in capital spending before year-end to take advantage of tax breaks on depreciation for qualified farm equipment. However, bankers indicated that strong farm income was limiting demand for some loans.
The volume of dairy loans was expected to remain flat though feeder cattle loan volumes were expected to rise modestly in the Dallas Fed District. As agricultural banks competed for qualified borrowers, interest rates on short and intermediate-term loans fell further in all Fed districts except Richmond.
With solid incomes, farm credit conditions generally improved in the fourth quarter. According to Federal Reserve District Agricultural Credit Surveys, more bankers reported higher loan repayment rates and fewer loan renewals and extensions at the end of the year as some farmers used income to pay off debt. In addition, the availability of funds for farm loans remained high and collateral requirements for non-real estate farm loans held relatively steady. Average loan-to-deposit ratios edged up in the Richmond District but dipped lower in the Chicago and Dallas Districts.
The Agricultural Finance Databook is a quarterly compilation of national and regional agricultural finance data.
Larry Dreiling can be reached by phone at 785-628-1117, or by email at email@example.com.