High Interest Rates Discourage Farm Loans

Ag bankers say farmers are tapping their savings from recent boom years instead of borrowing money at what are the highest interest rates since 2007. The average operating loan issued this past summer was nearly 20 percent smaller than the average a year ago, the lenders said in surveys by regional Federal Reserve banks.

“Lending has softened alongside nearly two years of increases in farm loan interest rates that have put considerable upward pressure on financing costs,” said the Kansas City Fed.

“The farm economy moderated in recent months as profit margins thinned alongside commodity prices and elevated expenses,” said the Kansas City Fed in a summary of a quarterly survey of ag bankers nationwide. “Credit needs have increased for many borrowers alongside high input costs, but strong liquidity built up in recent years has allowed many producers to supplement additional loan advances.”

The USDA estimates that net farm income, a broad measure of profitability, will total $141.3 billion this year, a plunge of 22 percent from the record $183 billion of 2022. Nonetheless, income this year would be still the second highest ever and $40 billion above its 10-year average. Receipts from crop and livestock sales would be down $23 billion, while expenses would be up $29 billion. The debt-to-asset ratio, an indicator of solvency, would decline slightly.

The average interest rate on all types of farm loans, after rising for nearly two years, was the highest since 2007, at 8.34 percent, said the Kansas City Fed. “Considerably higher financing costs have likely prompted borrowers with ample liquidity to limit debt usage, but any softening in farm finances could reduce cash reserves and put upward pressure on lending demand.”

As a result of the decline in farm lending, the volume of operating loans exceeding $1 million was half of its year-ago volume and the volume of smaller-sized loans was down 15 percent, said the Ag Finance Update. The change favored smaller banks, which typically handle smaller loans. They saw a 25 percent increase in non-real estate lending, while large banks saw a decline. The average operating loan this summer was nearly $59,000.

“The average duration of new farm real estate loans has increased gradually over the past year and was more than five years longer than the average loan from 2010 to 2020,” wrote Kansas City Fed economists Nate Kauffman and Ty Kreitman. Maturity dates for operating, livestock, and equipment loans held steady.

Source: Agriculture.com