Federal Reserve of KC Says Early Indications Point to Some Borrowers Struggling to Repay LoansFri, 22 Jul 2016 13:19:10 CDT
The need for farm lending remained high in the second quarter of 2016, driven by ongoing demand for operating loans, according to the Federal Reserve’s Agricultural Finance Databook. Respondents to the Survey of Terms and Bank Lending to Farmers indicated the total number of non-real estate loans made to farmers in the second quarter increased 6 percent from a year ago.
The prolonged environment of robust lending activity, amid persistently weak profits in the farm sector, has led to slight reductions in the performance of agricultural loans at commercial banks. According to first quarter commercial bank Call Report data, the share of outstanding loans for farm production that were 30 to 89 days past due crept closer to the 10 year average from 2005 to 2014, while the share of non-accruing loans has edged up the past two quarters and loans 90 days or more past due remained relatively steady. Although the share of troubled loans has remained low from a historical perspective, the increase in loans 30 to 89 days past due could be an early indication that borrowers are struggling to repay loans in a time of tight profit margins.
In addition, the share of net charge-offs at agricultural banks also edged up. The first quarter was the first in recent years in which the share of net charge-offs at agricultural banks was roughly equal to that of its non-agricultural peer group.
Despite the slight declines in loan performance and heightened risk, however, profitability at agricultural banks generally has remained strong.
The report concludes by saying "The lending environment in the farm sector has remained active despite ongoing indicators of growing risk. Demand for short-term financing has continued to increase during a period of persistently weak profit margins while past dues have crept higher in recent quarters. Banks appear to have taken some measures to manage potential risk of further pressure on farm finances; however, a protracted period of high loan demand and weakening credit conditions could intensify the challenges in the farm sector and at agricultural banks."
The Agricultural Finance Databook is a quarterly compilation of national and regional agricultural finance data. Click here to see the report, complete with graphs explaining the details of the Databook.
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