Further declines in interest rates on farm loans at commercial banks helped sustain farm lending during the third quarter, according to the Federal Reserve System's Agricultural Finance Databook.

The average effective interest rate on both real estate and non-real estate farm loans edged down between the May and August Survey of Terms of Banking Lending to Farmers.

In contrast, a rise in interest rates on U.S. Treasury securities in June placed upward pressure on interest rates commercial banks charge for nonfarm loans.

However, heated competition among lenders, a strong farm economy and solid loan repayment rates contributed to lower interest rates on farm loans during the third quarter.

Agricultural loan volumes at commercial banks returned to the previous year's levels during the third quarter after rising in the spring.

According to national survey data collected during the first full week of August, both real estate and non-real estate farm loan volumes held relatively steady when compared to last year. Rising farmland values supported farm real estate financing while high production costs bolstered demand for farm operation loans.

Agricultural banks reported improved profits and stronger capital positions at midyear. The return on assets at agricultural banks during the second quarter exceeded year-ago levels while the returns at other small banks were little changed.

Agricultural bankers indicated ample funds were available to satisfy a potential increase in farm borrowing if falling crop prices reduce this year's farm income.

The Agricultural Finance Databook is a quarterly compilation of national and regional agricultural finance data. The complete release is available at www.kansascityfed.org/research/indicatorsdata/agfinance.