The volume of non-real-estate agricultural loans, including those to livestock operations, increased significantly during the second and third quarters of 2012 according to a report from the Federal Reserve Bank of Kansas City. The volume of non-real estate farm loans jumped more than 5.0 percent during the second quarter compared to last year, while average interest rates on most types of agricultural loans were lower, as were delinquency rates.

During the second quarter, farm operating loans rose at their fastest pace in five years according to the report. That trend continued into the third quarter, as data from the first full week of August show the volume of short-term operating loans up 36 percent compared to the same time last year, reaching a new survey high.

Short-term lending for feeder livestock reached a two-year high and exceeded 2011 levels by 60 percent during the third quarter, largely due to drought conditions pushing calves and feeder cattle onto the market earlier than usual.

Lending activity helped drive stronger profits and at agricultural banks, as return on assets rose to a four-year high. Nationally, agricultural banks continued to outperform their peers in the second quarter, with an average rate of return on assets of 0.6 percent at the end of the second quarter, compared with 0.4 percent return at other small banks.  The average rate of return on equity at agricultural banks was 5.3 percent in the second quarter compared to 3.6 percent at other small banks.

After adjusting for seasonal trends, delinquency rates on non-real estate farm loans fell to 1.5 percent during the second quarter, their lowest level in four years according to the report. Farm real estate loan performance also improved during the second quarter as delinquency rates declined.

Farmland values continued upward across the nation’s mid-section, with non-irrigated cropland in Nebraska and South Dakota more than 30 percent above year-ago levels. In the eastern Corn Belt, farmland values rose between 10 and 15 percent, while continuing drought in Texas kept farmland values relatively flat.

Although the drought reduced crop yields, record high crop prices and widespread crop insurance coverage supported farm incomes and loan demand, according to the authors. Profits in the livestock sector, however, suffered due to high feed costs and lower feeder-cattle prices as producers were forced to liquidate herds.

Read the full report from the Federal Reserve Bank of Kansas City