Non-real estate farm loan volumes rose in the first quarter, led by a surge in capital spending that boosted intermediate-term loan volumes. According to loan survey data from the week of Feb. 6, 2012, loans for farm machinery and equipment held at high levels with a sharp jump in the volume of intermediate-term loans made for unspecified purposes. With low cow inventories lifting feeder cattle prices, banks also made larger short-term loans to the livestock sector. However, strong farm income for crop producers kept operating loan volumes relatively flat heading into planting season. Farm loan portfolios at small and mid-sized banks increased by almost a third compared to last year, and farm loan portfolios at large lenders grew by more than 20 percent.
Though loan volumes rose at both large and small agricultural lenders in the first quarter, the composition of their farm loan portfolios varied. Large banks made more intermediate-term loans that were typically rated as moderate risk. Small and mid-sized banks had a larger share of short-term operating and livestock loans that were generally rated as low risk. However, small and mid-size lenders also had a higher concentration of long-term farm real estate loans in their farm loan portfolios compared with large lenders, heightening their exposure to a potential correction in the farmland market.
Agricultural banks ended 2011 with their best financial performance in three years. The return on assets at agricultural banks in the fourth quarter rose for the second straight year, and annual net income distributions strengthened. Producers paid down debt with elevated farm incomes, reducing delinquency rates and net charge-offs for both farm real estate and non-real estate loans. Bankers reported plenty of funds were available for farm loans at historically low interest rates.
Farmland values continued to climb even with more farmland for sale at year-end. As farmland values soared by as much as 40 percent compared to last year, an increasing number of landowners auctioned off their land holdings. While non-farm investor interest helped keep bidding brisk, farmers remained the main purchasers of farmland, particularly when prices reached record levels.