by: Nate Kauffman and Ty Kreitman

Farm real estate debt continued to climb and led to a notable increase in agricultural loan balances at commercial banks. The pace of farm loan growth increased further in the third quarter and was faster among agricultural banks than those with less concentrated agricultural lending portfolios. Despite the increases in loan balances, farm finances remained strong and delinquency rates on agricultural loans reached an all-time low. As interest rates edged higher, increases in both agricultural and non-agricultural lending also supported earnings for farm lenders.

The outlook for the agricultural economy through the end of 2022 was generally positive, but some pressures remained looking ahead to next year. Profit opportunities for most producers across the sector remained favorable and continued to support farm finances. Agricultural credit conditions also remained strong, but improvement has been more measured in recent months alongside the pressures associated with uncertainty about commodity prices, intense drought and higher expenses. Despite some notable risks, farm finances remained bolstered by strong incomes in recent years and sharp growth in farm real estate values.

Third Quarter Commercial Bank Call Report Data

Growth in farm real estate loans picked up in the third quarter while increases in production lending remained more measured. Real estate and non-real estate loans grew about 7% and 2% from a year ago, respectively (Chart 1). Adjusting for inflation, farmland lending remained above the recent average and ticked up after declining slightly in recent years, while production lending remained subdued.

Chart 1: Farm Debt Outstanding at Commercial Banks includes two individual charts. Left, Change in Debt Outstanding- is a line graph showing percent change in outstanding farm debt at all commercial banks from the previous year in average quarter from Q1 2015 to Q3 2022 with lines for Total, Real Estate and Non-Real Estate. Right, Balance of Debt Outstanding- is a line graph showing the balance of farm debt in billion 2022 dollars in Q3 of every year from 2015 to 2022 with lines for Real Estate, Non-Real Estate and the 2010-2019 average for each. Sources: Reports of Condition and Income and Federal Reserve Board of Governors.

Considerable growth in farm real estate lending drove a faster pace of growth in lending among agricultural banks. Real estate and non-real estate loan balances at agricultural banks in the third quarter were 10% and 4% higher than a year ago, respectively (Chart 2). The quick rise in farmland lending pushed real estate loan balances at those banks to historically high levels and production loans continued to move towards the recent average.

Chart 2: Farm Debt Outstanding at Agricultural Banks* includes two individual charts. Left, Change in Debt Outstanding- is a line graph showing percent change in outstanding farm debt at all commercial agricultural banks* from the previous year in average quarter from Q1 2015 to Q3 2022 with lines for Total, Real Estate and Non-Real Estate. Right, Balance of Debt Outstanding- is a line graph showing the balance of farm debt in billion 2022 dollars in Q3 of every year from 2015 to 2022 with lines for Real Estate, Non-Real Estate and the 2010-2019 average for each. Note: Figures above are calculated using a panel of 1,042 agricultural banks from Q3 2022. Agricultural Banks are defined as banks with total agricultural loans comprising at least 25% of total loans. Sources: Reports of Condition and Income and Federal Reserve Board of Governors

Farm loan performance continued to strengthen steadily, and improvement has been broad. In fact, farm loan delinquency rates were less than 1% in about 80% of commercial banks with agricultural loans, and about half of all lenders reported no past dues (Chart 3). Moreover, less than 10% of commercial banks reported farm loan delinquencies greater than 3%, which was the lowest share on record.

Chart 3: Share of Commercial Banks by Farm Loan Delinquency Rate, Q3 – is a clustered column chart showing the percent of banks with various levels of farm loan delinquency rates (None, 0 to 1%, 1 to 3% and Greater than 3%) during Q3, with columns for 2010, 2015, 2019 and 2022. Note: Delinquent farm loans include all agricultural loans past due 30 or more days or non-accruing. Source: Reports of Condition and Income and Federal Reserve Board of Governors

Earnings also continued to improve alongside higher interest rates and loan growth. Liquidity at agricultural banks remained strong, but total loan growth outpaced deposit growth for the first time since 2019 as loan balances, particularly non-agricultural loans; rose considerably (Chart 4, left panel). Lending has grown alongside a sharp rise in interest rates, supporting an increase in the net interest margin and return on assets at agricultural banks for the second consecutive quarter (Chart 4, right panel).

Chart 4: Select Financial Indicators at Agricultural Banks, includes two individual charts. Left, Loan and Deposit Balances* – is a line graph showing the percent change in the balance of agricultural loans, non-agricultural loans and deposit balances from the previous year in every quarter from Q1 2020 to Q3 2022 . Right, Earnings Ratios - is a line graph showing the net interest margin and return on average assets as a percent in every quarter from Q1 2010 to Q3 2022. *Calculated using a panel of 1,042 agricultural banks from Q3 2022. Note: Figures above are calculated using a panel of 1,042 agricultural banks from Q3 2022. Agricultural Banks are defined as banks with total agricultural loans comprising at least 25% of total loans. Source: Reports of Condition and Income and Federal Reserve Board of Governors

Strong liquidity and credit conditions provided a firm buffer, but unrealized losses continued to pressure some measures of capital. The Tier 1 Leverage Capital Ratio at agricultural banks increased slightly alongside higher earnings, but substantial unrealized losses continued to push the equity capital ratio lower (Chart 5). Losses attributed to holdings of investment securities totaled nearly 35% of equity capital for farm lenders, however, ample liquidity and strong loan performance appeared likely to prevent most banks from having to sell securities and formally realize those losses.

Chart 5: Capital and Unrealized Losses at Agricultural Banks, includes two individual charts. Left, Capital Ratios – is a line graph showing the Equity Capital Ratio and Tier 1 Leverage Capital Ratio* at agricultural banks in every quarter from Q1 2015 to Q3 2022. Right, Unrealized Gain (Loss)-to-Total Capital*- is a line graph showing unrealized gain (loss) as a percent of total equity capital at agricultural banks in every quarter from Q1 2015 to Q3 2022. *Unrealized gains (losses) are included in the calculation of accumulated other comprehensive income (AOCI). Banks may elect to “opt-out” of including AOCI in the calculation of Tier 1 Leverage Capital utilized for regulatory purposes. However, these amounts are included in the calculation of the equity capital variable utilized in the Ag Finance Update – Commercial Bank Call Report data tables. Note: Figures above are calculated using a panel of 1,042 agricultural banks from Q3 2022. Source: Reports of Condition and Income and Federal Reserve Board of Governors

Data and Information

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Authors

Nate Kauffman

Senior Vice President, Economist, and Omaha Branch Executive

Nate Kauffman is Senior Vice President and Omaha Branch Executive at the Federal Reserve Bank of Kansas City. In his role as the Kansas City Fed's lead economist and represe…

Ty Kreitman

Associate Economist

Ty Kreitman is an associate economist in the Regional Affairs Department at the Omaha Branch of the Federal Reserve Bank of Kansas City. In this role, he primarily supports the F…