Wednesday, July 31, 2013
Out of Curiosity, Have You Changed Lenders Lately?Tweet
What are the current dynamics in farming? Farms are getting larger and operators are managing more acreage. To manage more acreage, farm operations require more and larger equipment. And with many pieces of equipment having electronic sensors and connections, costs have increased substantially. With per-acre revenue margins being small, more acreage has to be acquired, either through purchase of expensive farmland or through high cash rents. This assessment process of today’s farming dynamics is pointed in one direction that is a significant dynamic in its own right.
Larger farms and larger operating budgets lead one to larger demands for capital to finance today’s farming operations and not every community bank can afford to extend lines of credit with six and seven zeros to dozens of local farmers. Subsequently, they have to access credit from larger banks, say economists Nathan Kauffman and Maria Akers at the Federal Reserve Bank of Kansas City. Small community banks used to take care of nearly every farmer in the community, but when their credit needs expanded tenfold, the small banks could not keep pace. The economists say a recent survey indicates, “The share of non-real estate loans originated by large banks relative to their smaller counterparts jumped to the highest level in nearly 20 years.” But they also suggest that the shift to larger banks could result from better loan terms such as floating interest rates at lower rate levels.
The survey was taken in the second quarter of the year and reflected the demand for operating loans, compared to land purchase loans. They said the survey indicated increased loan demand for purchase of crop inputs, and less loan demand for machinery and equipment purchases. And the economists said there would be another shift in demand at the end of the crop year, due to expected low commodity prices and a strain on farm profits. That would “potentially boost the need for short-term loans and curtail farm capital spending at year-end.”
The dynamics in agriculture, focused on the need for increased credit and higher loan demand, is reshaping the lending industry itself. The Fed economists say the larger banks are getting the business from the larger farmers because of more attractive loan terms, “Almost 90 percent of non-real estate loans at large lenders were made with floating interest rates, double the percentage at small and midsized banks. Moreover, the average effective interest rate offered by large banks on non-real estate loans was 3.6 percent, much lower than the average 5.4 percent effective interest rate at small and midsized banks.”
Trends in Farm Lending
- Rising productions costs pushed loan volumes higher from April to June.
- Large bank loan portfolios for land loans have increased from 9% to 12%.
- Small bank loan portfolios for land loans have increased from 12% to 27%.
- Loans for input purchases grew 5.3% from 2012 to 2013.
- Machinery loans dropped almost a third for the second quarter year over year.
Impact on Farm Debt
- Farm debt increased 3.2% at the end of the first quarter, the most since 2009.
- Delinquency rates on non-real estate loans edged down 1.3% at the end of the 1st quarter.
- Delinquency rates on real estate loans trended down at lenders of all sizes.
Farmland value trends
- North Dakota’s values for non-irrigated land are climbing the highest, up 39% from 2012.
- Annual cropland value gains slowed from record highs in other states, pulling back to 20 percent or less throughout most of the Corn Belt.
- More bankers in the Chicago, Dallas and Richmond Federal Reserve Districts, however, expected farmland values to hold steady in the coming months compared with expectations at the end of 2012.
- In the Kansas City and St. Louis Districts, farm income expectations for 2013 were dampened by an anticipated drop in crop prices later this year if production rebounds from last year’s drought-reduced yields.
- With slack loan demand, ample funds were available for qualified farm borrowers. In fact, most agricultural bankers in the Chicago, Dallas and Richmond Districts classified loan-to-deposit ratios as lower than desired.
- Heated competition for high-quality farm loans pushed interest rates down further for short-term feeder cattle and operating loans, intermediate-term non-real estate loans and long-term real estate loans.
Larger farming operations require more capital, which is better served by larger banks than by local community banks. Land values continue to increase but are slowing down. Higher production costs created more loan demand in the second quarter of the year, but demand for equipment loans tapered off at the end of 2012. While farm debt is increasing, loan delinquencies are not.
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