In an update earlier this month from the Federal Reserve Bank of Kansas City, âLimited demand for agricultural loans, but large benefits for agricultural banks“, Nathan Kauffman and Ty Kreitman stated that”Agricultural loan in commercial banks continued to decline but showed signs of stabilization in the third trimester. According to Call Report data, farm debt has declined at the slowest rate in 2 years. Non-real estate debt has declined at a significantly slower pace than in recent quarters and agricultural mortgage loans increased slightly for the first time since mid-2019. The performance of agricultural loans also continued to improve rapidly, which a five-year low in delinquency rates. With the support of better loan performance and lower interest costs, the profitability of agricultural lenders has remained close to historic highs.
The outlook for farm income in 2021 remained strong heading into the year-end, alongside continued strength in agricultural commodity markets.
âHigh commodity prices have boosted producer incomes and supported rapid improvement in agricultural credit conditions and an increase in the value of farmland. At the same time however, input costs have increased significantly in recent months, which should increase credit needs and weigh on profit margins go forward.
Kauffman and Kreitman noted that “the balance exceptional agricultural loans in commercial banks retracted further, but at a much slower pace. Driven by a slight increase in farm mortgage loans and a smaller decrease in non-real estate loans, total farm debt fell by the smallest percentage since 2019. After drop at an average rate of about 5% over the previous four quarters, agricultural loans declined by less than 2 percent from a year ago.
The Kansas City Fed update also noted that “the volume of overdue agricultural loans continue to drop sharply next to improving agricultural finances and moderate lending activity. The volume of overdue agricultural and production mortgage loans continued to decline significantly, decrease of 30% and 40% from a year ago, respectively. The rapid recovery of repayment problems led to the lowest delinquency rate on agricultural loans in the third quarter since 2015. “
Kauffman and Kreitman added that, âIn addition to the strong performance of loans, the financial performance of agricultural banks has remained strong. Despite the continued compression of net interest margins, the profitability of agricultural banks has remained close to records (Graph 4, left panel). Strong asset growth weighed on interest margins despite an increase in the amount of net interest income (Chart 4, right panel).
“Net profit increased almost 20% compared to a year ago, which outperformed asset growth and generated a strong return on assets (ROAA) and supported banks’ ability to increase their capital.