Fifth District Survey of Agricultural Credit Conditions

2012

 

March 5, 2013

4th Quarter 2012 - Farm Loan Demand Weakened Further; Farmland Prices Edged Higher

 

Overview

Results from the Richmond Fed's latest survey of Fifth District agricultural lenders suggested a somewhat weaker lending environment during the fourth quarter of 2012. Bankers generally reported that farm loan demand dropped sharply, while they noted that requests for loan renewals or extensions contracted at a slower rate than in the previous quarter. Agricultural lenders indicated that loan repayment rates grew at a somewhat slower pace than in the third quarter and noted that farm loans were slightly less available. However, collateral requirements eased from third quarter levels. Reports indicated that interest rates for feeder cattle and intermediate-term loans rose, while operating and long-term real estate loans were lower. Turning to farmland values, fourth-quarter land prices were above both the previous quarter and year-ago levels.

Demand for Farm Loans

The demand for loans weakened further in the fourth quarter. Lenders attributed the weaker demand to excellent yields on most crops in the District and higher commodity prices, which allowed many farmers to improve their financial condition. In addition, contract prices for tobacco were favorable with solid net income for tobacco producers. Moreover, lumber prices were picking up due to the uptick in the housing sector.

Bankers in Virginia and South Carolina, in particular, reported that 2012 was an excellent year for farmers. An analyst in South Carolina noted that it was one of the best years that farmers had ever experienced and indicated that higher commodity prices resulted in stronger cash positions. A lender in North Carolina said that net farm income in his region was up in the fourth quarter from the previous year. He added that high commodity prices coupled with average to slightly above average yields for most producers will result in favorable farm cash flow. He also added that tobacco production for 2012 was above average and that initial tobacco contracts for 2013 appear favorable with tobacco companies increasing demand and prices for quality tobacco products. Lastly, a contact in North Carolina cited improvement in lumber prices due to the pickup in housing construction.

Looking ahead, lenders' expectations for farm loan volumes were mixed.The index for operating loans held steady at 26, while the gauge for expected demand for farm machinery loans moved down nineteen points to 17. In other categories, expected feeder cattle loans declined sixteen points to −13 and the index for crop storage loans loans lost twelve points to −22. The index for dairy loans inched down four points to finish at −25.

Loan Demand

Interest Rates

Interest rates for agricultural loans were mixed during the fourth quarter. Compared to third quarter levels, rates for feeder cattle loans moved up 114 basis points and rates for intermediate-term loans added 31 basis points. In other categories, interest rates for operating loans lost 5 basis points and rates for long-term real estate loans fell 20 basis points.

Availability of Credit

In the fourth quarter, 90 percent of lenders reported that they actively sought new farm loans — unchanged from the previous quarter. However, lenders reported that demand for farm loans weakened, and that the funds availability index declined ten points to 50.

Credit Quality

During the fourth quarter, the quality of agricultural credit demand was mixed. Loan repayment rates moved down fourteen points to 13, while the loan renewals index moved up fifteen points to −17. In addition, the index for collateral requirements eased seventeen points to end the fourth quarter at 13.

Farmland Values

The market value of good farmland averaged $3,421 per acre in the fourth quarter — 1.5 percent above the third quarter and 6.2 percent higher than year earlier readings.

Looking ahead, bankers anticipated that growth of farmland prices will change little during the first quarter of 2013. The index for expected land values slipped one point to 9.

Average Farmland Value
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Richmond

Aileen Watson
Senior Economic Analyst
(804) 697-7995