WASHINGTON, Aug. 11, 2016 -- A new report from the Federal Reserve Bank of Kansas City paints a dim picture of agriculture credit conditions in the nation’s heartland.
The survey of ag lenders throughout the seven-state 10th District covered by the bank shows credit conditions continued to deteriorate in the second quarter of 2016 as farm income “remained subdued.” The district includes western Missouri, Nebraska, Kansas, Oklahoma, Wyoming, Colorado and northern New Mexico.Nearly 75 percent of bankers responding to the survey reported farm income was down from a year ago. Bankers also indicated they expect farm income to remain weak in the third quarter.
“Persistent declines in farm income in the district have continued to affect agricultural credit conditions,” according to the report’s authors, Nathan Kauffman, the bank’s assistant vice president and Omaha Branch executive, and Matt Clark, assistant economist. “Slimmer profit margins also have pulled down the rate of loan repayments. Almost half of all respondents reported that loan repayments rates in the second quarter were lower than a year ago. In addition, the severity of repayment rate problems has increased slightly over the past year.”
The survey also found:
-- Bankers reported an increase in the share of loan applications that were denied in the second quarter. The higher rate of loan denials suggests the number of farm borrowers who are less creditworthy has increased over the past year.
-- Values of cropland and ranchland are dropping. Values of non-irrigated and irrigated cropland declined 3 percent and 5 percent, respectively, from a year ago. Ranchland values also fell 3 percent, continuing the downward trend of recent quarters. Many bankers indicated they expect further declines in farmland values in the months ahead.
-- While a significant number of bankers in each district state expect farm income in the third quarter to be less than a year earlier, they also expect the rate of decline to be sharpest in the Mountain States and Oklahoma, which are relatively more dependent on income from wheat, cattle and energy production than other parts of the district.
-- Main Street businesses are suffering. Almost 85 percent of bankers noted that the weakening farm economy has reduced Main Street business activity. That’s up from about 60 percent last year and just under 40 percent in 2014. The worst effects were being felt in the Mountain States and Oklahoma, regions with a stronger relative dependence on the livestock and energy sectors.
Looking to the future, the authors says crop prices at the end of the quarter “appeared poised to remain low along with growing expectations of a strong fall harvest,” and they warn that “borrowers without sufficient liquidity, substantial net worth or large borrowing bases may find it increasingly more difficult to attain financing if their creditworthiness continues to decline.”
Despite these concerns, the authors note that farm loans in the second quarter that were significantly past due or non-accruing remained slightly below recent averages amid a general, gradual downturn in the farm economy.
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