Farm Lending Steady, but Risks RemainAgricultural lending at commercial banks was steady in the second quarter, but risks in the farm sector continued to weigh on loan growth and credit conditions. The volume of non-real estate farm loans increased only slightly from a year ago as interest rates continued to trend up at a modest pace and maturities continued to lengthen. The rate of farm loan delinquencies edged higher, but the performance of agricultural banks generally remained strong, even as farmland values in most areas continued to decline.
Section A – Second Quarter Survey of Terms of Bank Lending to FarmersThe pace of farm lending at commercial banks remained relatively steady in the second quarter of 2017. The survey of Terms of Bank Lending to Farmers shows the volume of non-real estate farm loans originated in the second quarter increased less than 4 percent. Farm loan volumes at commercial banks with a sizable farm loan portfolio rose about 7 percent from the previous year, accounting for the slight overall increase.1 The volume of new farm loans in banks with a smaller farm loan portfolio continued a recent trend of decline from a year ago.
Despite the slight uptick in the second quarter, the total volume of new farm loans in the first half of 2017 remained subdued. The total volume of farm loans originated in that time was 7 percent less than the first half of 2016 (Chart 1). Although farm lending at commercial banks appears to have slowed over the past year, some of the sluggishness in the first half of 2017 may have been due to a prolonged renewal season. Amid a recent decline in working capital and a slight increase in risk associated with agricultural lending, some bankers and borrowers have taken more time to reaffirm financials, expenditures and loan terms from one year to the next.
Section B – First Quarter Call Report Data
Similar to recent trends in farm loan originations, farm debt outstanding at commercial banks remained stable in the first quarter. Data aggregated from Call Reports indicated that total farm debt increased only 2 percent from a year ago (Chart 7). Gains in farm real estate debt continued to drive the increase as non-real estate debt declined for a second consecutive quarter.
Farm loan delinquency rates increased slightly in the first quarter, but remained historically low. Delinquency rates for both farm real estate and non-real estate farm loans edged above 2 percent (Chart 8). Total delinquencies for farm real estate and non-real estate loans had not been above 2 percent since 2013 and 2012, respectively, but both have trended higher in recent quarters. However, delinquency rates have remained near their 10-year averages and less than the average rate for all bank loans.
Despite the upward trend in farm loan delinquency rates, the performance of agricultural banks has remained steady. Notably, the rate of return on assets has remained slightly above the five-year average of 1.1 percent (Chart 9). Likewise, the rate of return on assets at agricultural banks has remained above the rate of return at other small banks.
Section C – First Quarter Regional Agricultural DataDespite recent signs of reduced lending activity, regional Federal Reserve surveys indicated that borrowers’ demand for financing generally remained strong. Demand for farm loan renewals and extensions remained elevated in each Federal Reserve district, marking the ninth consecutive quarter that each district has reported an increase (Chart 10). In a similar vein, each district also reported a decline in the rate of loan repayments for a ninth consecutive quarter.
Lending in the farm sector generally remained stable, even as farm loan delinquency rates continued to trend up. Farmland markets have remained relatively strong, despite ongoing declines in most areas, and lending connected to farm real estate has continued to rise at a steady pace. However, producers still appear to be cautious in financing non-real estate purchases as income in the farm sector has remained suppressed. If farm income remains low, agricultural lenders may need to adjust to an environment of persistently sluggish loan growth and heightened risk in their farm loan portfolio.
1Banks with a portfolio of more than $25 million in farm loans.