Farm debt at commercial banks grew further in the fourth quarter, and delinquency rates remained historically low. Farm real estate and production loans were about 7% and 3% higher than the previous year, respectively. Agricultural banks expanded both farm and non-farm lending considerably in 2022 which, together with a slowdown in deposit growth, dropped bank liquidity down from recent highs. With higher loan demand and a steep rise in interest rates, profit and capital metrics at agricultural banks improved through the end of last year.

Demand for farm lending grew in 2022 alongside substantial increases in production costs, but the outlook for the agricultural economy in 2023 remained strong. Despite persistent concerns about operating expenses, higher interest rates and intense drought in some areas, commodity prices remained elevated and continued to support profit opportunities. Strength in farm income and liquidity likely contributed to lower delinquency rates on all farm loans, which were less than just 1%.

Fourth Quarter Commercial Bank Call Report Data

Steady growth in real estate and non-real estate farm lending pushed debt balances higher. Total farm debt increased about 6% between the fourth quarter of 2021 and the end of 2022, the fastest pace since early 2016 (Chart 1). Real estate and non-real estate loans increased at an average pace of nearly 6% and 2% during 2022, respectively.

Chart 1: Farm Debt Outstanding at Commercial Banks - is a line graph showing percent change in outstanding farm debt at all commercial banks from the previous year in every quarter from Q1 2015 to Q4 2022 with lines for Total, Real Estate and Non-Real Estate.   Sources: Reports of Condition and Income and Federal Reserve Board of Governors.

Loan performance continued to improve gradually alongside strength in farm finances despite increases in debt. Rates of delinquency on farm loans at both agricultural and non-agricultural banks during the fourth quarter edged lower for the third consecutive year (Chart 2). Strong farm income in recent years has bolstered liquidity for many producers and led to historically low rates of past dues on agricultural loans

Chart 2: Farm Loan Delinquency Rates, Q4– is a line graph showing farm loan delinquency rate in the fourth quarter of every year from 2010 to 2022, with lines for real estate loans at non-agricultural banks, non-real estate loans at non-agricultural banks, real estate loans agricultural banks and non-real estate loans at agricultural banks.  Note: Delinquent farm loans include all agricultural loans past due 30 or more days or non-accruing. Agricultural Banks include all banks with farm loans comprising at least 25% of total loans.   Sources: Reports of Condition and Income and Federal Reserve Board of Governors.

Notable increases in farm and non-farm lending led to a moderation in liquidity at agricultural banks. Loan balances grew considerably faster than deposit balances at banks most concentrated in agricultural lending at the end of 2022 (Chart 3). Demand for both agricultural and non-agricultural lending at farm banks grew throughout the year as deposit growth stabilized, and the loan-to-deposit ratio increased from multi-decade lows.

Chart 3: 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 Q4 2022. Right, Loan-to-Deposit Ratio* - is a line graph showing the loan-to-deposit ratio as a percent in every quarter from Q1 2010 to Q3 2022.  *A higher loan-to-deposit ratio corresponds with lower bank liquidity and a lower loan-to-deposit ratio corresponds to higher bank liquidity.  Note: Calculated using a panel of 1,032 agricultural banks from Q4 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

Growth in lending and higher interest rates contributed to improvement in financial performance at agricultural banks. Following steady contractions in recent years, profits at agricultural banks increased in 2022 alongside an increase in net interest margins (Chart 4). Higher earnings also supported a gradual rise in capital reserves throughout the year, despite some ongoing pressure from unrealized losses associated with securities holdings.

Chart 4: Select Financial Indicators at Agricultural Banks, includes two individual charts. Left, 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 Q4 2022. Right, 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 Q4 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 1,032 agricultural banks from Q4 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

Endnotes

  1. 1

    According to the External LinkUSDA Farm Sector Income Forecast, net farm income rose 8% in 2022 from the previous year after growing 43% in 2021. Similarly, working capital (a measure of farm liquidity) on U.S. farms rose by more than 40% in 2021 compared with the previous year and remained steady in 2022.

Authors

Cortney Cowley

Senior Economist

Cortney Cowley is a senior economist in the Regional Affairs Department of the Federal Reserve Bank of Kansas City. She also serves as a special advisor on the agricultural econo…

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…