Farm lending by U.S. commercial banks soared during the fourth quarter of 2012 as farmers borrowed at low interest rates to buy costly livestock feed, new machinery, and fuel for harvest as well as to pre-pay for seed and fertilizer for the 2013 crop season, the Federal Reserve Bank of Kansas City said on Wednesday.
Bankers reported a spike in farm machinery and equipment loans during the quarter as farmers purchased the big ticket items before potential adverse changes in U.S. tax laws in 2013. Record crop and range land prices in many areas of the Corn Belt and Plains added collateral to farmer balance sheets, at a time when interest rates were at or near record lows as the Fed manages the U.S. economic recovery.
"Total volumes for non-real estate farm loans rose at the fastest pace in three years during the quarter as commercial banks made more loans at higher average amounts," the Fed said in its agricultural finance databook based on a November national survey of 250 ag bankers.
Demand for loans was strong among livestock producers as they struggled with soaring grain and hay prices, which soared amid the worst summer drought in the United States in more than 50 years. Rising fertilizer and seed prices enticed many grain producers to buy 2013 supplies now rather than wait.
"Loan volumes for feeder livestock rose further as prices for feeder livestock remained high due to short supplies resulting from past herd liquidations," the survey said.
The uncertainty of government tax policy for 2013 amid the contentious budget negotiations over the year-end "fiscal cliff" also spurred grain farmers, who benefited from massive crop insurance payments that buoyed their finances, to make capital spending purchases rather than risk loss of tax breaks in 2013.
"Tax provisions allowing accelerated depreciation on qualifying farm asset purchases such as machinery, equipment, and special-use or single-purpose agribusiness buildings, including grain bins, drying systems, and livestock barns, were set to expire at the close of 2012," the Fed survey said. "Producers taking advantage of the tax incentive helped to more than double the volume of farm machinery and equipment loans compared with last year."
U.S. farm loans late 2012:
The farm economy, a bright spot in recent years buoyed by booming exports and biofuels demand, continued to buoy the overall U.S. economy. The Commerce Department said earlier on Wednesday that U.S. GDP shrank 0.1 percent in the fourth quarter, hit by the effects of Superstorm Sandy on the East Coast and by uncertainty over the fiscal cliff political fight in Washington.
Farmland values stayed strong during the third quarter of 2012 despite the drought as demand for farm real estate remained hot amid record high grain prices and overseas food demand from China and other industrializing nations. Farm land in the Midwest Corn Belt and central Plains states continued to notch record highs.
Despite soaring land prices, commercial bankers reported an upward spike in farm real estate loans heading into the fourth quarter as farmers worried about potential wild cards in tax policy in Washington. Sellers became more willing and buyers snapped up land.
"Elevated farmland prices and potential changes in tax policies motivated more land owners to sell before the end of the year," the Fed survey said. "As a result, most agricultural bankers expected gains in farmland values to moderate during the next year and level off at record high levels," the Fed added.
FARM BANKS BALANCE SHEETS STRONG
Agricultural bank performance strengthened in the third quarter of 2012. The rate of return on assets at these banks was 0.9 percent at the end of the third quarter, versus 0.5 percent at other small banks. Despite higher loan volumes, an increase in deposits kept the average loan-to-deposit ratio at the banks near historic lows, the Fed said.
"With ample funds for farm loans, strengthening loan demand fueled intense competition for agricultural lending activity among financial institutions. Farm interest rates fell to new lows, with some banks easing collateral requirements," the survey said.
Outstanding farm debt at commercial banks rose 4 percent above year-ago levels in the third quarter, driven by non-real estate loan originations. The volume of non-real estate farm loans rose more than 5 percent, and farm real estate loan volumes rose more than 3 percent.
Loan delinquency rates held relatively steady while farm interest rates fell to new lows, ranging from about 5.5 to 6 percent, with some banks easing collateral requirements.
"Interest rates were the lowest at large banks that offered more loans with floating interest rates. Loan-to-deposit ratios firmed with higher loan volumes, and the average return on assets at agricultural banks reached a five-year high during the third quarter," the Fed said.