The strong agricultural economy, fueled by high commodity prices, has reduced farmers’ reliance on farm lenders, despite concerns about rising input costs, according to a Federal Reserve survey of ag bankers. “Higher costs are likely to put upward pressure on demand for credit, but strong farm income and working capital could also supplement financing for some borrowers,” said a Kansas City Federal Reserve Bank summary on Thursday.
According to the Kansas City Fed report, banks borrowed less money for non-real estate loans in the fourth quarter of 2021 compared to the same period in 2020. The average volume for non-realty loans over the past 12 months was at a 10-year low. Farm operating loans are responsible for most of the decline.
Non-realty loans cover a range of expenses, from livestock to farm machinery, while operating loans cover the day to day costs of crop or livestock production. A nationwide survey of farm bankers revealed that the average non-realty loan size, which was $83,000, was 20% smaller than it was in the fourth quarter 2020. Operating loans, which averaged $55,500, were over 30% smaller.
“Broadly, conditions in the agricultural economy remained strong through 2021 and continued to support farm finances,” said the Kansas City Fed. “Despite intensifying concerns about rising input costs impacting farmer returns in the coming year, commodity prices remained elevated and supported profit opportunities through the end of the year.”
The USDA estimated that net farm income in 2021 would be $116.8billion, which is a broad measure for profits. This figure is the highest since 2013. It was also helped by $27billion in direct federal payments. The rising production costs, softening commodity price and the expiration pandemic relief programs will all lead to a decline in farm income, according to analysts.
“Overall, the agricultural credit market is riding several positive trends into 2022,” wrote Purdue economists Brady Brewer and Todd Kuethe in an outlook on agricultural credit this year. Farm balance sheets have been improved by low interest rates and rising land value in 2021.
“Over the past several years, there have been high levels of uncertainty in the agricultural commodity markets due to the COVID-19 pandemic, political disputes, and supply chain issues,” wrote Brewer and Kuethe. “While these are expected to continue at least in the near future, the agricultural credit sector does not have as many concerns.”
Source: Successful Farming