42 JULY / AUGUST 2019 Current State of Agricultural Lending Purdue University survey results AG BANKING The agricultural sector is in a state of transition. Lower commodity prices have squeezed farmers’ margins, leading to tighter cash flows. In addition to lower commodity prices, other issues such as trade, weather, interest rates and farm bill policies affect the outlook of the farm economy. To measure the state of the agricultural finance sector, Purdue University, along with researchers at Kansas State University, implemented an agricultural lender survey to provide an aggregate measure of the current and future conditions lenders are reporting. The national agricultural lender survey was initiated in the spring of 2013. The survey is conducted every six months – in the fall and spring of each year. This is done to assess the sentiment of agricultural lenders before planting and after harvest for the majority of the U.S. crops. Lenders from around the nation participate in the survey, with the majority of respondents from the Midwest, and all responses are anonymous. The idea behind the survey is to measure the opinions of lenders involved in agriculture about key measures in order to obtain a picture of agricultural lending. In the survey, lenders are asked about interest rates, spread over cost of funds, loan volume, nonperforming loans and current/future agricultural land values in their loan service territories. These questions provide a comprehensive, forward-looking analysis of the agricultural lending sector. For farm loan interest rates, lenders are divided on what interest rates will do in the future. Of the lenders most recently surveyed, 39% expect interest rates to continue increasing, 38% expect interest rates to remain the same, and 23% expect interest rates to decrease from current levels. Farm loan volume is a measure being monitored closely in the survey since the first drop in commodity prices. As reports of working capital shortages in the agricultural sector became common, farm loan volume has remained consistently high in the survey. This past survey, however, saw a slight decrease in operating loan volume. As one lender stated: “Our institution has supported our customers over a number of challenging years, but is also at the point of terminating relationships with the bottom end of the portfolio.” Another key measure of interest is nonperforming loans. Lenders are asked about nonperforming loans in their lending institutions’ portfolios: 39% of lenders reported higher nonperforming loans in the spring of 2019, 49% indicated the same amount of nonperforming loans, and 12% indicated lower rates of nonperforming loans. This outcome agrees with recent data from the Federal Reserve Bank of Kansas City, which shows that nonperforming agricultural loans have increased. It should be noted, though, that the nonperforming rates are still below the historical average. The Economic Research Service of the U.S. Department of Agriculture estimates that farmland accounts for more than 80% of a farmer’s balance sheet. Understandably, farmland is of importance, as it represents the main source of collateral for a majority of farmers. Since 2015, more lenders have reported decreasing farmland values in their loan service territories than lenders that reported increasing values. Indiana farmland has retained much of its value from the peak in 2012, but 42% of lenders expect farmland values to decrease in the future. This trend may pose a threat to the equity position of farmers. Overall, the survey results paint a picture of uncertainty in agriculture. Low commodity prices, trade disputes, interest rate uncertainty and volatility have changed the game. Lenders remain worried about the future. To date, however, nonperforming loans remain below historical levels, with farm loan volumes remaining steady. HB Brady Brewer, Ph.D. Assistant Professor, Agricultural Economics Purdue University brewer94@purdue.edu
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