KC Fed: Slump in capital spending weighs on farm lending

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A slowdown in lending for capital purchases contributed to lower farm loan volumes in the fourth quarter. In recent years, strong incomes and tax incentives prompted many producers to upgrade or replace farm machinery and equipment.

According to national survey data collected during the first full week of November, the volume of loans for farm machinery and equipment purchases dropped to the lowest level in more than two years. This drop occurred despite attractive loan terms of low interest rates and longer average loan maturities.

Elevated farm income and a decline in input costs dampened short-term lending to the farm sector in the fourth quarter. A rebound in crop production in most regions helped offset a sharp drop in corn prices at harvest, keeping farm income relatively high.

In turn, lower corn prices reduced feed costs for livestock operators. Crop farmers also saw operating costs decline due, in part, to a decrease in fertilizer prices.

With fewer operating loans being made, large lenders in particular competed for market share by offering further reductions in interest rates. Farm real estate lending also eased during the fourth- quarter survey period.

While farmland values generally were still rising, agricultural bankers reported gains had moderated from the brisk pace of the past few years.

Most bankers felt that farmland values would hold steady at high levels heading into 2014. With solid farm income, agricultural banks reported sound profits as the fall harvest season wound down.

At the end of the third quarter, agricultural banks posted the second-highest average return on assets in five years. These returns have consistently surpassed returns reported at other small banks.

Delinquency rates on both farm real estate and non-real estate loans continued to trend down as bankers reported relatively high loan repayment rates.

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