Spike in big U.S. farm loans may add risk to agricultural banks

Farmers are feeling the impact of the U.S.- China trade war as commodity prices drop

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Chicago | Reuters – A sharp jump in American farmers seeking operating and equipment loans of at least US$1 million fuelled a spike in agricultural lending in the third quarter of 2018, as trade worries added to economic strain in the farm sector, the Federal Reserve Bank of Kansas City said Oct. 19.

Why it matters: Lending is the latest sector of U.S. agriculture to be affected by the U.S.-China trade dispute, which has slashed U.S. soybean exports to China and dragged some crop commodity prices to decade lows.

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The increase in the size of loans also boosted the share of agricultural lending at large banks, adding potential risk to their loan portfolios as lenders are concerned about the longer-term impact of the U.S.-China trade war on their farmer customers, said Nathan Kauffman, the bank’s lead economist.

Even as farm debt continues to grow, the performance of national agricultural banks remains generally solid, the bank said.

“It’s a cautionary environment right now,” Kauffman said in an interview. He noted that credit conditions in the farm sector have been slowly worsening over the past few years.

The volume of non-real estate farm loans in the third quarter was more than 30 per cent higher than in the year-earlier period, according to the bank.

The jump in these types of loans — typically, money that is used for funding the operation of a farm — was the highest percentage increase for the period in 16 years, according to data from the National Survey of Terms of Lending to Farmers.

Bankers are seeing ongoing consolidation among producers who are struggling and shedding assets due to weak farm profits, Kauffman said.

“Those producers that are taking on the assets are relatively large,” Kauffman said. “Fewer players are requiring more to finance those operations — and some of those players could become more highly leveraged.”

Delinquency rates on farm real-estate loans through the second quarter of 2018, the latest data available, ticked higher across the United States.

Farm real estate loan delinquencies for that quarter were also higher than the rate of delinquencies on all bank loans for the first time in nearly 20 years, according to the bank, citing Federal Deposit Insurance Corp. data.

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