Home loans push farm debt up


Strong growth in agricultural real estate debt pushed up agricultural loan balances at commercial banks in the second quarter. Outstanding farm debt rose about 5% from a year earlier, the fastest pace in nearly six years. While agricultural mortgages have continued to expand, production loans have increased slightly following sluggish demand in recent years. Loan performance also improved further. Recent loan growth has supported a slight improvement in agricultural bank interest margins and revenues compared to last quarter, but bank liquidity has remained abundant.

The farm economy remained stable over the past quarter, providing continued support to farm finance. The price of most major commodities remained high and the outlook for profit opportunities across the sector in 2022 was positive despite heightened volatility in some markets. With significantly higher production costs and weather risks, revenues could come under pressure if commodity prices fall more sharply, and credit needs could also be pushed higher. Despite growing risks, agricultural balance sheets remained strong alongside high liquidity, and a strong increase in the value of agricultural real estate also continued to support agricultural credit conditions.


An acceleration in agricultural real estate debt led to further growth in agricultural loan balances. Agricultural real estate loans increased by nearly 7% compared to a year ago and outstandings remained above the average of the last 10 years (Chart 1). Non-real estate farm debt showed further signs of rebounding, rising modestly after nearly two years of considerable contraction; but sales remained well below the recent average.

Chart 1: Outstanding Agricultural Debt in Commercial Banks comprises two individual charts. On the left, the change in stock of debt is a line graph showing the percentage change in stock of farm debt from the previous year during the average quarter of Q1 2015 to Q2 2022 with lines for the total, real estate and non-real estate. On the right, the outstanding debt balance is a line graph showing the agricultural debt balance in billions of 2022 dollars as a four-quarter moving average from 2010 to Q2 2022 with lines for real estate, non-real estate assets and the 10-year average for each . Sources: Reports of Condition and Income and Federal Reserve Board of Governors.

As debt balances increased, loan performance continued to improve along with the strength of farm finances. The delinquency rate on agricultural real estate and non-real estate loans with agricultural and non-agricultural banks fell for the seventh consecutive quarter (Chart 2). Problem lending rates on home loans are at historic lows and defaults on production loans are also at historic lows.

Chart 2: Farm loan delinquency rate, Q2 is a line chart showing the farm loan delinquency rate in the second quarter of each year from 2010 to 2022, with lines for home loans in non-farm banks, non-farm loans real estate in non-agricultural banks. agricultural banks, real estate loans from agricultural banks and non-real estate loans from agricultural banks. Note: Agricultural loans in arrears include all agricultural loans that are 30 days or more past due or unexpired. Sources: Reports of Condition and Income and Federal Reserve Board of Governors.

The earnings performance of agricultural banks has improved slightly in line with recent loan growth and an increase in interest rates. After two years of steady contraction, the net interest margin edged up in the quarter and supported a slight improvement in bank earnings (Chart 3, left panel). Rising interest income coincided with growing loan balances, but agricultural lender liquidity remained abundant (Chart 3, right panel).

Chart 3: Selected agricultural bank financial indicators, includes two individual charts. On the left, earnings is a line chart showing the net interest margin and return on average assets in percent for each quarter from Q1 2010 to Q2 2022. On the right, liquidity is a line chart showing the ratio loan/deposit percentage in each quarter from Q1 2010 to Q2 2022. Source: Reports of Condition and Income and Federal Reserve Board of Governors.

The capital ratios of the agricultural banks supervised for regulatory purposes have stabilized, but some measures of capital have fallen considerably due to recent developments in the securities markets. The Tier 1 Leverage Capital ratio remained solid and increased slightly compared to the previous quarter, but the equity ratio fell sharply (Chart 4). The substantial cumulative loss that is excluded in the Tier 1 leverage capital measure accounted for the difference between the two measures. The losses were attributed to large downward adjustments in the value of longer-term investment securities held by banks that would only affect income after a sale and are generally excluded from capital measures used to assess terms and conditions at most banks.

Chart 4: Capital and Accumulated Other Comprehensive Income (AOCI) in Agricultural Banks, includes two individual charts. On the left, the capital ratios is a line graph showing the capital ratio, tier 1 capital ratio and AOCI excluded from the tier 1 capital calculations* for each quarter from the first quarter of 2015 to the second quarter of 2022. On the right, Unrealized Gain (Loss) on AFS Securities is a clustered column chart showing unrealized gains (losses) on AFS Securities in billions of dollars with columns for the average for 2015-2019, 2020, 2021, Q1 2022 and Q2 2022. calculation of the Tier 1 capital ratio used for regulatory purposes. However, these amounts are included in the calculation of the equity variable used in the Ag Finance Update — Commercial Bank Call Report data tables. Note: All ratios and items above are calculated from Q2 2022 panel of 1,062 agricultural banks. Sources: Reports of Condition and Income and Federal Reserve Board of Governors.

The views expressed in this article are those of the authors and do not necessarily reflect the views of the Federal Reserve Bank of Kansas City or the Federal Reserve System.


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