Overall good economic conditions in agriculture led to the lowest non-real estate agriculture lending at commercial banks in the fourth quarter of 2021 in nearly a decade, according to a new report from the Federal Reserve Bank of Kansas City.
According to the national survey of terms of lending to farmers, smaller-sized loans limited agricultural lending at the end of 2021. Non-real estate agricultural loans at commercial banks, in particular, decreased by about 13% in the fourth quarter, and the yearly average came in at its lowest since 2012.
The decline was driven by a “sharp drop” in operating loans and lending at banks with the largest farm-loan portfolios, according to a KC Fed analysis of the data.
“Despite an increase in the number of all types of loans, the average size of all non-real estate and operating loans was more than 20% and 30% less than a year ago, respectively,” the analysis said.
“Loan sizes decreased considerably at lenders of all sizes, but the number of loans increased notably at small- and mid-sized lenders and decreased at banks with large agricultural portfolios.”
The KC Fed points to “strong” economic conditions in the ag economy through 2021 as the reason for the decline.
“Despite intensifying concerns about rising input costs impacting producer returns in the coming year, commodity prices remained elevated and supported profit opportunities through the end of the year,” the KC Fed report said.
“Higher costs are likely to put upward pressure on demand for credit, but strong farm income and working capital could also supplement financing for some borrowers.”
The survey found the number of new loans at small- and mid-sized lenders “increased considerably,” while most of the decline in loan volumes was among large lenders.
“The number of loans made by banks with the smallest farm-loan portfolios grew more than 35% from a year ago, but the average size of those loans was nearly 30% lower,” the KC Fed said.
“The decline in loan size among the largest lenders was less pronounced, but those banks also made fewer loans and accounted for nearly all of the decline in total non-real estate lending.”
The report said the higher number of loans and smaller loan sizes was consistent across lending types, “but farm operating loans” drove most of the decline in lending volume.
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“The sharp drop in the size of operating loans was a notable contrast to the trend in recent years,” the report said.
“Following several years of consistent increases and a record high for the fourth quarter in 2020, the average size of operating loans dropped to the lowest level for this time of year since 2016. The number of operating loans remained low compared with past years but increased from the historic low for the fourth quarter reached last year.”
In addition, the volume of loans higher than $100,000 decreased nearly 20% from a year ago, while the volume of all other loans increased almost 15%.
When it comes to interest rates, the report said the average interest rate charged on non-real estate loans declined in the fourth quarter and remained lowest for the largest loans and at the largest agricultural banks.
“The average rate on loans greater than $100,000 remained about 140 basis points lower than rates on smaller loans and has declined slightly more from the same time in 2019,” the report said.
“Similarly, the average rate at the largest farm banks remained lower than other lenders and has also declined slightly more from the same time in 2019.”
Read the full report here.
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