Farm debt rises but finances stay strong
In a recent update from the Federal Reserve Bank of Kansas City, “Farm Debt Climbs but Financial Stress Remains Limited,” Nate Kauffman and Ty Kreitman indicated that, “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.”


Kauffman and Kreitman pointed out that, “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.”

 The Kansas City Fed update noted that, “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. 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.”

 David Oppedahl, a Policy Advisor at the Chicago Fed, explained in the AgLetter that, “With farm incomes still robust, the District had a year-over- year gain of 20 percent in its agricultural land values in the third quarter of 2022. This was the fourth year-over-year increase in a row of at least 20 percent for District farmland values. Indiana led the way with a year-over-year surge in farmland values of 29 percent; the other District states also saw double-digit year-over-year growth in farmland values.”

 The AgLetter stated that, “After being adjusted for inflation with the Personal Consumption Expenditures Price Index (PCEPI), District farmland values were still up 13 percent in the third quarter of 2022 relative to a year ago; this was the fifth consecutive quarter with at least as large a year-over-year increase in real farmland values.”

 And the Chicago Fed indicated that, “In real terms (after being adjusted for inflation with the PCEPI), the average interest rate on farm operating loans was slightly above zero in the third quarter of 2022, after being in negative territory for the four previous quarters; the average real

 interest rate on feeder cattle loans followed a similar trajectory over this period. Yet, the average real interest rate on farm real estate loans remained negative for the fifth quarter in a row.”

 Kauffman and Kreitman added that, “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.

 “Moreover, less than 10% of commercial banks reported farm loan delinquencies greater than 3%, which was the lowest share on record.”


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