Commodity Prices Boost Farm Lending

The Federal Reserve of Kansas City release a report  title “COMMODITY PRICE SWINGS BOOST FARM LENDING” By Nathan Kauffman, Omaha Branch Executive and Maria Akers, Associate Economis the Agricultural Databook on National Trend of Farm lending.

According to the report Agricultural lending rose further in the third quarter. Commodity price movements toward the downside have continued to increase the need for farmers to finance their operations as profit from commodities products continue to fall.

Rising leverage  in past commodity cycles contributed to the farm busts of the 1920s and 1980s. Farmers were unable to repay bank loans. If this trend of lower commodity prices and higher debt continues could  dent not only farmers, but the economy recovery as a whole. Current high inventories will require higher demand and interest rate to remain low.

For commodity prices to bounce back we will need to see lower production and decreasing inventory with demand to remain strong.

The Federal Reserve of Kansas City highlights their  concerns about lower farm income and rising debt levels, which could intensify in 2015. See full report

Report Highlights

  • Lending to the agricultural sector rose in the third quarter, driven by larger loans for feeder livestock purchases.
  • Operating loan volumes remained high compared with the past several years.
  • Capital spending spree of the past several years appears to have waned as loan volume for farm machinery and equipment fell during 2014.
  • The volume of loans secured by farmland and the volume of loans to finance farm production rose at a similar pace, 6.5 percent and 6.3 percent, respectively

commodities commodities 1

 

Report Conclusion

Commodity price swings have helped drive an increase in lending to the farm sector during 2014. A sharp rise in feeder cattle prices boosted loan amounts to the livestock sector while a steep drop in crop prices increased the need for short-term financing to crop producers. Bankers met the increase in loan demand and reported that farm loan quality remained sound. Although farm income was expected to decline from recent record years, most producers appeared to be positioned to manage a modest rise in farm debt for 2014. However, concerns about the outlook for commodity prices and input costs may make 2015 a more challenging year for farm sector profitability.

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