Farm debt increases rapidly at commercial banks

By Scout Nelson

Farm operating debt at commercial banks has continued to rise rapidly through mid-2024, according to a new report from the Federal Reserve Bank of Kansas City. Outstanding non-real estate farm debt at these banks grew approximately 10% compared to the previous year during the second quarter.

This increase is even more pronounced at agricultural banks, where debt balances have rebounded to align with longer-term trends.

The report highlights that a sluggish agricultural economy and reduced liquidity within the farm sector have led to increased financing needs. Despite a slight rise in financing demands, delinquency rates on farm loans have remained low, providing some reassurance in the current economic climate.

As noted by the Kansas City Fed, “Growth in farm production loans stayed strong through mid-year as the agricultural economy continued to soften.”

In contrast to the increase in operating debt, growth in real estate debt has been relatively subdued following a significant reduction in 2021.

The report indicates that agricultural banks experienced notable increases in both real estate and operating loans, with balances rising approximately 6% and 15%, respectively, over the past year. For these lenders, the debt levels for real estate and non-real estate are approaching long-term averages.

However, liquidity for agricultural lenders has tightened alongside recent loan growth. The loan-to-deposit ratio among farm lenders has climbed to the highest level since 2020. This decline in liquidity is attributed to strong loan growth and heightened competition for deposits, leading community banks to seek alternative funding sources.

Despite these challenges, capital levels at agricultural banks showed slight improvement due to steady earnings. The tier 1 leverage capital ratios increased modestly from the previous quarter but remained below the 10-year average.

Additionally, the net interest margin and return on assets at these banks have largely remained stable, although elevated funding costs continue to exert pressure on margins.

While credit conditions have tightened in recent months, loan delinquency rates remain low. Approximately 1% of real estate and non-real estate farm loans were at least 30 days overdue in the second quarter, a minor increase from record low levels seen a year earlier. Notably, about half of the increase in delinquent loans can be attributed to loans that are now 30 to 89 days past due.

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