An indirect sign of stress in the agricultural sector, small agricultural banks are making adjustments, such as syndicating loans and imposing higher interest rates, to offset risk in the face of strong demand for agricultural loans, a said the Federal Reserve in its quarterly report Agricultural finance data collection. The Fed’s Beige Book, meanwhile, said spring flooding in the northern plains and western cornbelt could place an additional burden on the agricultural sector faced with weak commodity prices.
“Despite a slight decline in the total number of loans reported by agricultural bankers, agricultural loans continued to increase in the first quarter of 2019. The growth in lending volumes is mainly due to further increases in the average size of loans to farmers, ”Ag Finance Databook said. The average loan was $ 85,510 from January to March, compared to $ 80,090 in the first three months of 2018 in a low-income environment.
Small agricultural banks syndicated or brought other institutions to 40% of their loans at the start of 2019, up from 10% in 2012 during the commodities boom. Small agricultural banks are also seeking USDA loan guarantees on an increasing portion of their loans. “Increasing levels of loan guarantees and (loan) equity holdings in small agricultural banks relative to all banks could be an indication of high financial stress in the agricultural sector,” the Federal Reserve said. It defines small agricultural banks as having less than $ 500 million in assets and more than 15% of its loan portfolio in agricultural production and home loans.
Interest rates on non-real estate loans, which cover everything from buying livestock and farm equipment to paying operating expenses, edged up this year, to an average of 5.5%, said the Databook. The rates were almost a point higher, 6%, in the small banks than in the large agricultural banks. A year ago, the average rate was 4.7%.
In the April issue of Beige book, the Minneapolis Federal Reserve said agricultural conditions “remain weak. In South Dakota and southern Minnesota, where the flooding has been most severe, the impact could be significant. The Federal Reserve Bank of Chicago said farmers in the central Midwest “continued to face low corn and soybean prices” and that many had decided “to continue to hold onto this year’s crops. last and to delay the conclusion of contracts for this year’s harvest ”. in the hope that the Sino-US trade war will end and grain prices will rise.
Regional Fed banks in Chicago, St. Louis and Kansas City have mentioned farmers’ concerns about flooding this spring and the potential impact on this year’s crop yields is that fieldwork is being delayed. by the end of spring. “While the full impacts of the flooding have remained unknown as the recovery ensues, conditions could place additional stress on some farms in the coming months,” the Kansas City Fed said.
Despite stagnant farm incomes and rising farm debt, default rates on farm loans “have remained historically low,” the Databook said. Defaults topped 2% in 2018. The value of agricultural land has generally remained stable, “providing continued support to the agricultural sector”.