Results from the Richmond Fed’s latest survey of Fifth District agricultural banks indicated a softer lending environment during the third quarter of 2012. Bankers generally reported that farm loan demand edged lower after stabilizing during the previous quarter. They also noted that requests for loan renewals or extensions declined further, while the rate of loan repayment increased. Respondents also said that farm loans were generally more available and that collateral requirements increased somewhat since our last report. Reports also indicated that interest rates for agricultural loans were lower across all categories. Turning to farmland values, third-quarter land prices were slightly below the previous quarter, but were somewhat above year-ago levels.
The demand for loans weakened in the third quarter. Bankers attributed the softer lending environment to higher commodity prices, excellent yields, an increase in tobacco contracts, and sound profits for many farmers. Moreover, lenders mentioned that higher input costs had negatively impacted the poultry, dairy and livestock industries.
A banker in South Carolina reported that the corn crop was outstanding. He noted that excellent rainfall during the growing season had lead to very good yields, which coupled with high commodity prices should help farmers in his area.
In contrast, a lender in North Carolina said that rainfall received in mid-summer throughout the growing season provided necessary moisture for average to above-average yields, but dry conditions early in the season negatively impacted some corn farmers and resulted in sub-par yields. On the bright side, he added that growing conditions for tobacco in most areas were favorable, thus yields surpassed last year's results. He also mentioned that demand from tobacco companies had increased, resulting in a significant rise in prices and attainable profits for most tobacco farmers.
Nevertheless, a contact in Virginia said that dairy farmers were having a hard time keeping up with feed bills, causing some suppliers to be put in a bind with their account receivables. Similary, a banker in North Carolina cited higher feed prices as the primary problem weighing heavily on the poultry and livestock industries. However, he indicated that the recently announced magnitude of foreign grain purchases by some integrators should help moderate feed prices and, hopefully, minimize negative margins predicted in the near future.
Looking ahead, lenders' expectations for farm loan volumes in the fourth quarter of 2012 were mixed. The reading for crop storage loans held steady at 0, while the expected demand for operating loans gained 18 points to finish at 35. In other categories, expected farm machinery added 32 points to end at 45 and dairy loans remained unchanged at −29. In addition, feeder cattle loans edged up two points to finish at −25.
Interest rates for agricultural loans were lower for all categories during the third quarter. Compared to second quarter levels, rates for feeder cattle loans moved down 110 basis points and rates for operating loans fell 61 basis points. In other categories, interest rates for intermediate-term loans lost 54 basis points, while rates for long-term real estate loans eased 3 basis points.
In the third quarter, 100 percent of lenders reported that they actively sought new farm loans, up from 88 percent in the previous quarter. Moreover, lenders reported that demand for farm loans weakened. The funds availability index increased 12 points to 60.
During the third quarter, the quality of agricultural credit demand was mixed. Loan repayment rates increased 25 points to 25, while the loan renewals index dropped 30 points to −35. In addition, the index for collateral requirements added nine points to end the third quarter at 26.
The market value of good farmland averaged $3,370 per acre in the third quarter, which was 0.4 percent below second quarter, but 2.5 percent higher than year earlier readings. Looking ahead, bankers anticipate that growth of farmland prices will pick up during the fourth quarter of 2012; the index for expected land values gained six points to 10.
Senior Economic Analyst