US agricultural banks remain profitable as their balance sheets grow and risk rises in the face of declining loan performance, but high demand for short-term loans could eventually pose a challenge.
A Kansas City Federal Reserve Bank report said that the number of non-real estate loans in the sector remained above the 10-year average, despite declining slightly from a year ago. Lending volumes also remain high.
With low commodity prices, operating expenses have grown to account for 62 percent of non-real estate loan volumes, the highest percentage since 2009.
However, director of the TIAA-CREF Center for Farmland Research at the University of Illinois Bruce Sherrick told Agri Investor that while the farm credit system remains strong by historic standards, “The loss rates [for farm credit] are and have been incredibly low. By historic standards, they’re not even approaching the yellow zone. I would expect them to tick up a little bit.”
He said that while operators, particularly the Midwestern row crop states, have faced leaner balance sheets over the last few years, the squeeze came directly after a period of record grain prices and strong revenues that lasted until around 2009.
The increase in operating loans may bode poorly for some farmers, said Sherrick, but the sector as a whole remains surprisingly well capitalised.
“The current debt levels we see in the sector … [have] dropped in the last 10 years to a very low level,” he said. “If you look at the aggregate debt-to-assets ratio for [the] agriculture sector in total, it’s around 10 or 11 percent.”
“Despite slight increases in loans past due and net charge-offs, returns at agricultural banks remained strong,” agrees the the Kansas City Federal Reserve Bank report. “Returns on assets, a typical measure of bank performance, increased in the first quarter from a year ago for the fourth consecutive year; other small banks also showed further increases.”
However, as high demand for short-term loans has risen, operating loan interest rates have also grown, as the rate of loan repayments has continued to decline.
The report warns, “A protracted period of high loan demand and weakening credit conditions could intensify the challenges in the farm sector and at agricultural banks.”