This report was created by Jason Henderson, Associate Dean in the Purdue College of Agriculture and Director of Purdue Extension, and is entitled “Highlights on Agricultural Bank Financial Conditions”. It originally appeared in the Agribusiness Council of Indiana Newsletter.
Low commodity prices and the lack of farm profitability are straining the agricultural finance sector. Agricultural banks report denying more agricultural loan applications that in recent years as farm repayment rates continue to deteriorate. In addition, agricultural banks report shrinking liquidity (funds) available for agricultural lending, which typically places greater demand on Farm Service Agency loan guarantee programs. Below is a brief highlight of agricultural finance conditions based on Federal Reserve publications.
Agricultural banks are denying more agricultural loan applications. Almost half of the agricultural banks in the Tenth (Kansas City) Federal Reserve District report denying more than 4% of loan applications in 2018, compared to a third in 2015. The share of banks reporting denying more than 10 percent of agricultural loans has increased sharply from 7.8% in 2015 to 17.8% in 2018.Farmers are struggling to repay farm loans, especially in the Corn Belt. Agricultural banks responding to Federal Reserve surveys indicate continued deterioration in repayment rates for agricultural loans. The Chicago Federal Reserve District reported severe declines in repayment rates, suggesting more intense farm financial stress in the Corn Belt states of Iowa, Illinois, Indiana, Wisconsin and Michigan. Deterioration in loan repayment rates was less severe west of the Mississippi River as the Dallas Federal Reserve District reported the smallest decline in repayment rates and the Minneapolis and Kansas City Federal Reserve Districts reported substantial, but smaller declines in the first quarter of 2018.
Liquidity at U.S. agricultural banks has declined recently and remains well below historical levels. Deposits are a primary source of funds for lending at agricultural banks. Loan-deposit ratios have reached 0.8 percent recently and agricultural banks report having fewer funds available for lending activity. As a result, farm loan guarantee program funding could be more critical for agricultural lending in the coming year as banks try to mitigate risk.