Kansas City Fed: Farm Lending Remained Muted in Third Quarter

In an update last week from the Federal Reserve Bank of Kansas City (“Ag Lending Update: Fewer Loans Issued to Farmers Limit Lending Activity“), Cortney Cowley and Ty Kreitman stated that, “Farm lending remained muted in the third quarter of 2020 but increased from last year according to the National Survey of Terms of Lending to Farmers. Despite growing 15% from the previous year, total non-real estate loan volumes in the third quarter were below the 20-year trend for that period.

“Farm lending has increased steadily since 2000, but activity in the third quarter has slowed following sharp growth in 2018. In addition, farm loan originations remained below the 5-year average.”

Last week’s update explained that, “Subdued volumes of operating loans contributed to the slowdown in lending. Loans for operating expenses increased from a year ago but remained less than 2017 and 2018. Loans to finance feeder livestock and farm machinery followed a similar trend, while the volume of loans for other livestock remained steady. All other loans declined for the second straight year, further weighing on overall loan volumes.”

With respect to interest rates on loans, Cowley and Kreitman pointed out that, “Interest rates on loans made to farmers declined sharply alongside the recent decrease in benchmark rates. In the third quarter, the average effective interest rate on non-real estate farm loans fell 40 basis points from the previous quarter and was 180 basis points less than a year ago.”

In conclusion, the Kansas City Fed update stated that, “Despite increasing somewhat from last year, originations of new farm loans at commercial banks remained subdued in the third quarter. Prices for most agricultural commodities remained low leading into the third quarter, contributing to a weak economic environment and weighing on lending conditions in the agricultural sector.

Although government payments and programs have improved the outlook for farm finances, they also may have reduced the need for financing for some farm borrowers. Moving forward, market conditions for some agricultural commodities could improve by year end due to lower expectations for crop inventories and an uptick in prices in October.

“However, the outlook for agricultural finance, like the general economy, is highly uncertain amid the ongoing pandemic.”