Data from the Federal Reserve Bank of Kansas City shows lending at agricultural banks stabilized in the third quarter of 2017, but bankers have slightly increased their risk ratings on new non-real estate loans. This latest data reflects the financial stress on farm operations prompted by the sharp drop in net farm incomes. It also suggests ag bankers and their borrowers are working through the difficulties, reducing the likelihood of a rash of farmland foreclosures like agriculture saw in the 1980s.
The quarterly survey of ag bankers in the five Federal Reserve bank districts covering the heartland found demand for loans for operating expenses were the primary driver of all non-real estate farm lending in the third quarter. Operating loans have accounted for nearly 60% of the total volume of non-real estate farm loans during the past four quarters, the highest in the 40-year history of the survey. Conversely, the share of other loans has fallen to levels last seen in the early 1990s.
Bankers have slightly increased their risk ratings on new non-real estate farm loans. In the third quarter, the share of non-real estate farm loans classified as “special mention” increased four percentage points from the previous year and the share of loans classified as “minimal risk” declined about two points. Although the share of loans classified as “special mention” continued to increase in the third quarter, nearly 90% of farm loans still were assigned a rating of “acceptable” or better in the third quarter, suggesting financial conditions have deteriorated only modestly.