Farm and Ranch Finances Softening

Agricultural credit conditions moderated during the second quarter, but the farm economy overall in the plains and mountain states is steady. The Federal Reserve Bank of Kansas City surveys commercial bankers in its District each quarter regarding farm credit conditions. The Kansas City District encompasses Nebraska, Kansas, Oklahoma, Colorado, and parts of Missouri, Wyoming, and New Mexico. Responses from the second quarter survey were summarized in a recent article by Cortney Cowley and Ty Kreitman, economists with the bank. Cowley and Kreitman write that commercial bankers indicate a softening is occurring in financial conditions on farms and ranches. Other observations by Cowley and Kreitman include:

• The number of lenders reporting farm incomes were lower relative to the year prior rose for the fourth consecutive quarter. More than a third of bankers anticipate weaker income conditions than last year in the third quarter of the year.

FIGURE 1. SHARE OF BANKS REPORTING LOWER FARM INCOME

Source: Cortney Cowley and Ty Kreiman, Tenth District Ag Credit Conditions Moderate, Kansas City Federal Reserve Bank, August 10, 2023.

• Borrower liquidity declined in the second quarter for the first time since 2020. Nearly half of the bankers reported producer cash reserves were less than the same time a year ago. A similar rate of deterioration was expected in the next quarter.
• Fewer than 15 percent of all farm loan balances had repayment problems and the vast majority of the problems which existed were considered minor. However, the share of bankers reporting slower repayment rates reached the highest level since 2020 and a similar share expected continued slowing in the months ahead.

FIGURE 2. SHARE OF BANKS REPORTING LOWER REPAYMENT RATES

Source: Cortney Cowley and Ty Kreiman, Tenth District Ag Credit Conditions Moderate, Kansas City Federal Reserve Bank, August 10, 2023.

• Loan demand remained flat, but some bankers expect a rebound in demand due to elevated production costs and liquidity depletion. Higher production costs have pushed up credit needs for some borrowers, while many others have utilized cash holdings to supplement loan balances and reduce interest expenses.
• The rate of denials on farm operating loans remains at historically low levels.
• The interest rate environment has changed notably for farm borrowers as interest rates on operating loans rose above 8 percent, on average, in the second quarter. 

FIGURE 3. AVERAGE INTEREST RATES BY STATE

Source: Cortney Cowley and Ty Kreiman, Tenth District Ag Credit Conditions Moderate, Kansas City Federal Reserve Bank, August 10, 2023.